• Thu
  • Dec 18, 2014
  • Updated: 12:02pm
PUBLISHED : Monday, 08 July, 2013, 12:00am
UPDATED : Monday, 08 July, 2013, 4:54am

Beijing's investigation of drug and baby formula firms a good start

Investigation of price-fixing, anti-competitive behaviour should extend to state-owned firms controlling a wide range of major services


Wang Xiangwei took up the role of Editor-in-Chief in February 2012, responsible for the editorial direction and newsroom operations. He started his 20-year career at the China Daily, before moving to the UK, where he gained valuable experience at a number of news organisations, including the BBC Chinese Service. In 1993, he moved to Hong Kong and worked at the Eastern Express before joining the South China Morning Post in 1996 as our China Business Reporter. He was subsequently promoted to China Editor in 2000 and Deputy Editor in 2007, a position he held for four years prior to being promoted to his current position. Mr. Wang has a Masters degree in Journalism, and a Bachelors degree in English.

Last week, Beijing launched two high-profile investigations into possible price-fixing and anti-competitive behaviour by pharmaceutical companies and the makers of baby milk formula on the mainland.

As multinationals dominate China's lucrative high-end prescription drugs and milk powder sectors, the investigations have triggered concern that Beijing is targeting foreign companies in order to protect the interests of domestic manufacturers.

While that concern appears to be understandable, it is only one part of the story.

Until a few years ago, it would have been almost inconceivable to see multinationals in the crosshairs of a government investigation, as both the central government and local authorities were trying hard to woo them for their investment, technical know-how, high-quality products and best-management practices.

However, as those multinationals have become the dominant market players, mainland sentiment towards them and their products has started to change dramatically.

More interestingly, the latest probes initiated by the National Development and Reform Commission (NDRC), China's top economic planner, appear to have been driven by rising concerns over social stability.

Since 2008, when melamine-spiked baby milk formula killed at least six children and made about 300,000 infants sick, Chinese mothers have turned to imports or foreign-brand formula manufactured on the mainland. This has enabled foreign diary companies to enjoy roaring business and to increase prices by double digits annually over the past few years, while dealing a devastating blow to domestic manufacturers.

This has created a huge social headache for the central government as the parents, who feel they have no choice but to purchase the pricey foreign products, have become increasingly angry over the situation.

Beijing's scare tactics seem to have worked straight away. The Swiss food company Nestle and French firm Danone announced last week they would cut the price of their infant milk formula products.

Beijing's investigation into the pharmaceutical companies also partly stemmed from frustration over their failure to lower drug prices despite its repeated efforts. Loud complaints about high drug prices have resonated among people across the mainland as the central government struggles to reform the medical sector and build up an affordable health care system.

According to an NDRC statement released last week, it is investigating 27 companies on cost issues and 33 over pricing, including units of GlaxoSmithKline, Merck and a number of other foreign companies.

In particular, Beijing reportedly plans to determine the difference in prices of imported products sold by foreign firms on the mainland, compared to those in other markets.

Indeed, that is one of the key grudges many mainlanders have held against the foreign drug companies, as the Chinese believe those firms price their drugs much higher on the mainland than in other overseas markets.

There is little doubt that Chinese consumers will welcome the investigations, which are highly likely to force both domestic and foreign companies to lower their prices for drugs and baby formula.

But they should also put more pressure on the government to deal with much bigger culprits behind price-fixing and anti-competitive behaviour - namely the state-owned conglomerates that largely monopolise the oil, natural gas, electricity, transport and telecom sectors.

In November 2011, the NDRC fired the first shot by launching an anti-trust probe into China Telecom and China Unicom, two state-owned telecom giants, accusing them of dominating the internet broadband market and unfairly preventing private firms from entering the market.

Despite the overwhelming evidence against the two telecom giants, the NDRC has failed to release its findings after more than 18 months.


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This article is now closed to comments

which is more important? food quality or food price-fixing?
Maybe the foreign companies wouldn't be able to price gouge if Chinese state companies were held to account on safety issues. This is the reason prices have risen. And while tainted milk was a problem at least 5 years ago, the government still has not cracked down on local companies. I guess it's always easier to go after foreigners. Just take a look at today's story in the SCMP: ****www.scmp.com/news/hong-kong/article/1277600/trans-fat-found-mainland-china-baby-milk-formula-brands?utm_source=edm&utm_medium=edm&utm_content=20130708&utm_campaign=scmp_today
What Wang Xiangwei well illustrates is what Thomas Sowell terms 'first stage thinking' on an economic issue. Foreign companies charge high prices for products which China produces poorly or unreliably so use government to coercion to force these companies into charging lower prices. So the government forces the companies to lower prices, and then what? The government wins the first round, but also sends a message that if a foreign firm earns too much in the China market they will forced by the government to earn less. Instantly foreign firms with interest in serving the Chinese market, particularly those firms in related industries, reduce their China investment and marketing plans. Companies hate uncertainty and the Chinese government has just introduced a large amount of arbitrariness and uncertainty. Plans are adjusted accordingly and choices for the China market are reduced.
You may think 'Hah, China is such a big market, every company wants in', and in this you would be wrong. There is no bigger 'potential' market for air pollution reduction, but as I know from personal experience, American companies generally ignore the market because of the bad experiences companies have had in the past. (I talked to many related U.S. companies at the Reinhold NOx conference in the U.S. Feb 2013 and they stated they were not interested in prospects in the China market.) Foreign companies take their business elsewhere and China experiences worse pollution.


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