China’s watchdogs show they have teeth in probing infant milk, drugs and Tetra Pak

July 5, 2013 5:55 pm

China’s watchdogs show they have teeth

By Kathrin Hille and Leslie Hook in Beijing and Patti Waldmeir in Shanghai

Tetra Pak became the latest multinational to be targeted by Chinese regulators on Friday, with the launch of an antitrust investigation against the European food packaging group.The announcement followed a probe into the pricing practices of 60 drugmakers by the National Development and Reform Commission, China’s main economic planning agency, and another pricing investigation against baby formula makers. The unveiling of three probes involving foreign companies within the space of one week has led to concerns that multinationals are being targeted by the Chinese authorities – and that their high hopes of the vast Chinese market could be disappointed.Baby milk manufacturers including Nestlé agreed to slash prices in China by up to 20 per cent almost immediately after regulators unveiled their investigation.

However, lawyers and corporate executives said that while antitrust activity was intensifying, the government’s moves were not a campaign against foreign companies, but more a sign of the country’s evolving antitrust regime.

“I don’t think foreign companies are specially targeted by government in these campaigns. More Chinese companies are involved and I still think the government is stricter with domestic companies,” said Li Changqing, a Chinese antitrust lawyer.

“But all of them are good signs that the government is trying to improve the enforcement of the Anti-Monopoly Law, which is new and was barely enforced before.” The investigations also showed that the government was more serious about inflation and was trying to bring prices down, he added.

Even so, companies and lawyers are likely to watch the Tetra Pak case – launched by the State Administration for Industry and Commerce – particularly closely. SAIC is in charge of registering and managing industrial and commercial companies.

“It brings SAIC into the game, which has not done any major antitrust cases. We can now expect SAIC to follow NDRC in becoming more activist and more confident,” said an antitrust lawyer in Hong Kong.

Zhang Mao, head of SAIC, said in a speech published on the regulator’s website on Friday: “To enhance antitrust law enforcement, SAIC has filed a case against Tetra Pak Group for possible abuse of market dominance and has organised more than 20 provincial and municipal [departments] to conduct relevant investigations.”

Tetra Pak confirmed SAIC had asked the company to provide information concerning its business in China, but said it had not received formal notice of any investigation. “We are co-operating and providing whatever information they require,” it said. China is Tetra Pak’s biggest market by revenue.

When China adopted its Anti-Monopoly Law in 2008, it split the regulatory responsibility between the Ministry of Commerce, which deals with merger oversight, and NDRC and SAIC for the so-called “behavioural” aspects of competition, such as market dominance.

Analysts say SAIC’s role is likely to cover practices other than pricing, which falls into NDRC’s area of responsibility. “The Tetra Pak case should help us understand what to expect from SAIC as a regulator in this field,” the Hong Kong lawyer said.

The government probe into drug pricing mainly targets mainland companies, and only a handful of multinationals, including Astellas of Japan, Merck of the US andGlaxoSmithKline in the UK.

The government has been expanding access to medical insurance and deepening the services it covers in recent years and, like administrations everywhere, it is eager to bear down on costs. Official statistics put China’s total pharmaceutical sales in 2011 at $71bn.

“All over the world, regulators want cases that directly impact consumers. That applies to the formula case. It will probably be very popular,” said Sebastien Evrard, a partner at Jones Day in Beijing.

Foreign-made formula in the $12bn-a-year market is sold in China through multiple layers of distributors. According to lawyers, the investigation covers the relationship between manufacturers, distributors and retailers.

It also looks at attempts by the branded companies to force retailers not to offer their product below a certain minimum price – a practice known as resale price maintenance – which is illegal under Chinese antitrust law and in many other countries.

A can of foreign formula in China can be up to twice as expensive as its equivalent in Europe.

But while the investigation targets five foreign brands, it also involves two Chinese companies, Zhejiang-based Beingmate, which said it will cut prices soon, and Guangzhou-based Biostime. Chinese dairy groups Mengniu and Bright Dairy said they were not involved.

Some lawyers argue the baby milk investigation represents a logical next step in NDRC’s evolution as an antitrust regulator. In January, the department followed regulators in other countries in fining foreign LCD panel makers for operating a price cartel.

Shortly afterwards, it handed another hefty fine to Moutai and Wuliangye, China’s leading makers of baijiu, the homegrown spirit, over resale price maintenance.

“With those two cases, they signalled that they were ready to target foreign companies and that they were ready to move against resale price maintenance, so the formula companies should have seen it coming,” said one lawyer.