Milk probe resolves with fines, lower prices

Resolution of a price-fixing probe into powdered milk makers indicates a recent wave of actions and negative reports against foreign firms may be winding down.

PUBLISHED : Thursday, 08 August, 2013, 3:12pm
UPDATED : Thursday, 08 August, 2013, 3:12pm

A surprise flare-up in scandals involving foreign companies that began in July appears to be subsiding, with one of the earliest scandals over price fixing by milk powder makers getting resolved through a series of fines and price adjustments. I won't comment too much on the validity of the claims, since I've discussed that element of the story before with my assertion that this sudden round of probes may be at least partly motivated by politics. More importantly, this resolution of the milk powder case is likely to be followed by similar closure for some or all of the other recent scandals, allowing everyone to get back to the more important business of creating products that are safe and affordable.

The milk powder scandal first burst into the headlines in early July, when the National Development and Reform Commission (NDRC), China's powerful state planner, launched a probe into price-fixing allegations against a half dozen makers of infant milk formula. The NDRC noted the companies, including Mead Johnson (NYSE: MJN) and Danone (Paris: BN), had raised their prices around 30 per cent since 2008. It implied the companies had raised the prices partly to take advantage of growing public distrust of local dairies, many of whose products had been tainted with the industrial chemical melamine at that time.

Following revelations of the dairy probe, most of the foreign companies announced voluntary price reductions to address the NDRC's concerns. Now media are reporting the NDRC has formally fined the six dairy companies a collective $110 million (HK$853 million). Mead Johnson was fined the most, required to pay $33 million (HK$256 million), followed by a $28 million (HK$217 million) fine for Danone. Media are drawing attention to the fact that the size of the fines is extremely large for China, a country where fines are often so small that they have little or no deterrent effect.

These fines do indeed seem like some of the largest I've seen in China, though they are still small enough that they will probably have little or no impact on the companies. Instead, the more important message to these and other companies is that the government is watching them closely and won't tolerate this kind of opportunistic price raising that is one of the factors helping to drive inflation.

Other similar probe in the recent series involved similar price-fixing allegations against drug makers and gold traders, many of them big foreign names. I expect we will probably see those two probes soon resolved in similar manner, with the companies paying fines and showing proper contrition accompanied by pledges to change their behavior. A number of other scandals to emerge over the last month seem like one-time events that will also quickly fade, including one involving fast food giants KFC and McDonalds (NYSE: MCD) over excessive levels of bacteria in some of their ice cubes.

As a longtime China media watcher, I should note that this kind of sudden surge in negative reports about foreign companies does seem to happen periodically. The impetus is never really clear, and often the big global brands are simply being used as examples to warn both domestic and international companies to stop engaging in improper behavior or raise awareness of social issues.

Based on past patterns, these waves of negative reports usually last for a few weeks at the maximum, and then quietly fade as media move on to other issues. If that's the case this time, then we should hopefully see the other probes resolved soon. Then everyone can return to their usual business of doing business.

Bottom line: Resolution of a price-fixing probe into powdered milk makers indicates a recent wave of actions and negative reports against foreign firms may be winding down.

To read more commentaries from Doug Young, visit youngchinabiz.com

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