China dream sours for foreign companies

August 9, 2013 11:44 am

China dream sours for foreign companies

By Tom Mitchell in Beijing

The “Chinese dream” articulated by China’s new president, Xi Jinping, is fast becoming a nightmare for some of the world’s most powerful corporations. Mr Xi’s speech, on his accession to the presidency in March, hinted at a more assertive approach to match China’s economic power – and since then, government investigations and state media exposés targeting foreign investors have become a regular feature of the country’s business landscape. Public officials say this simply reflects broader efforts to tackle bad practice, but some executives complain that foreign groups appear to be encountering particularly heavy scrutiny under the new leadership.Those suspicions were reinforced this week, when the powerful National Development and Reform Commission fined six baby formula manufacturers$110m for anti-competitive pricing policies.

Five of the six companies were well-known multinationals including Mead Johnson of the US, Danone’s Dumex unit and New Zealand’s Fonterra group. This first high-profile enforcement of Article 14 of China’s 2008 anti-monopoly law, which bans companies from imposing retail price floors for their products, came just weeks after an explosive police investigation into alleged bribery by staff at GlaxoSmithKline, the UK pharmaceuticals group.

None of the milk powder companies is challenging the NDRC’s penalties, and GSK has said some of its employees may have violated Chinese law.

Other investors in China have had to fend off state-media campaigns accusing them of lesser sins such as quality control failings and poor customer service. Apple’s chief executive, Tim Cook, made a high-profile apology on April 1 for “misunderstandings” and stressed his company’s “immense respect” for China. State media had accused the company of “greedy” and “incomparably arrogant” behaviour, citing complaints about substandard after-sales service for Chinese customers.

Volkswagen recalled 380,000 vehicles because of gearbox problems highlighted by an investigative report in March by CCTV, the state broadcaster.

For some executives, the critical drumbeat in the five months since Mr Xi and his premier, Li Keqiang, formally took power has been too intense to be dismissed as a coincidence. “They may have found something against these [foreign] companies,” said one lawyer who defended a multinational targeted in the NDRC’s baby formula investigation. “But what about the Chinese companies?”

“As a government official, going after state-owned companies is difficult,” adds Steven Bing, an analyst who previously worked in China for several western pharmaceutical groups. “So if you want to make an example of someone to fix the system, you target the foreign companies.”

Chinese government officials reject suggestions that there has been a co-ordinated effort to gang up on foreign investors. On Thursday, the NDRC denied that its investigation into pricing practices in the baby formula market was coloured by anti-foreigner bias. In a statement on its website, the commission dismissed such speculation as “groundless” and welcomed the “important” role played by foreign investors in China’s economy.

The government’s defenders point out that a Chinese company, Biostime International Holdings, paid the highest fine in terms of percentage of annual revenues, equivalent to 6 per cent of turnover. Illinois-based Mead Johnson paid the largest fine assessed: Rmb204m ($33m), or 4 per cent of its China unit’s turnover. The anti-monopoly law allows the NDRC to impose fines ranging up to 10 per cent of a company’s annual revenues.

Two foreign companies, Nestlé’s Wyeth Nutrition unit and Meiji Dairies of Japan, were also included in the NDRC’s probe but were not penalised.

I wouldn’t say the anti-foreigner bias is as strong as some people might think

– Veronica Lockyer, a competition lawyer with Orrick in Shanghai

Some observers believe that the action against foreign companies is merely part of a much bigger government campaign. “I wouldn’t say the anti-foreigner bias is as strong as some people might think,” argues Veronica Lockyer, a competition lawyer with Orrick in Shanghai. “There are often other motivations in the background for anti-monopoly enforcement.”

Chief among these is the government’s determination to assuage public discontent over the high price of essential goods and services, especially as an aggressive propaganda campaign attempts to foster the idea that every citizen has a stake in Mr Xi’s “dream”. As Robert Parkinson, at recruitment company RMG Selection, says: “The cost of living in Beijing is just crazy for younger workers.”

Spiralling healthcare costs are of particular concern to the government, and many suspect this is a factor in the criminal probe into alleged bribery and corruption by some GSK employees. The NDRC is separately conducting a review of pricing practices in the pharmaceutical sector.

Milk powder groups rethink high prices in China amid crackdown

In the aisles of one Wumart department store in central Beijing, tins of foreign-brand baby formula are so valuable that they are kept behind locked glass. “Some people try to steal them,” Han Guofeng, a sales assistant, explains as she unlocks the display. “You should definitely buy the foreign brands. They’re safer.”

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The high cost of foreign milk powder brands also makes them an easy target. Demand and prices have soared in the five years since tainted domestic formula products killed several babies and made thousands more sick.

Some lawyers also point to a long but quiet build-up in pricing and other anti-monopoly investigations that targeted both foreign and local companies and predate the Chinese leadership transition.

Before these investigations, enforcement of the 2008 anti-monopoly law had focused on asserting Chinese regulators’ right to weigh in on the world’s biggest merger and acquisition agreements. Glencore is selling a Peruvian copper mine, which could fetch about $5bn, as a condition for Chinese clearance of its merger with Xstrata.

“Previously the anti-monopoly law was all about merger law and merger filings,” says Ms Lockyer. “But there were signals last year that something else was going to happen. The NDRC in particular had an increase in its personnel. It was a sign that it was beginning to flex its muscles.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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