It has been reported that the National Development and Reform Commission (NDRC), China’s price monopoly regulator, has been conducting an antitrust probe against several major baby formula brands since May 2013. Although most are leading foreign brands – including Mead Johnson, Dumex (owned by Danone), Wyeth (owned by Nestlé), Abbotts and Friesland Campina – two Chinese firms, Biostime and Beignmate, are also involved in the probe. The companies in question have been accused of violating Article 14 of the Anti-monopoly Law (AML) by limiting the lowest resale prices offered by their distributors and retailers, which potentially eliminated market competition. All of these investigated companies recently confirmed that they are cooperating with the NDRC’s investigation.
The investigation was first made public by Biostime in an announcement filed to the Hong Kong Stock Exchange on 30 June 2013, which stated that the "NDRC initiated the investigation on the grounds of an alleged violation of Article 14 of the Anti-monopoly Law by Biostime Guangzhou in maintaining sales prices of its distributors and retailers". Shortly after Biostime’s announcement, the NDRC confirmed that it had already launched antitrust investigations against leading formula manufacturers for suspected price fixing and other illegal pricing practices.
Following two landmark antitrust penalties announced earlier this year, the NDRC’s antitrust probe against baby formula manufacturers might put down another milestone in the history of the NDRC’s antitrust enforcement. Two earlier penalties involved Moutai and Wuliangye and liquid crystal display (LCD) manufacturers. Moutai and Wuliangye received a total fine of RMB449 million for engaging in vertical price-fixing restraints, while six leading LCD manufacturers received total economic penalties of RMB353 million for conducting a price cartel.
As of this writing, all the formula manufacturers in question have taken corrective actions one after another in response to the NDRC’s investigation. They have adopted similar price-cutting policies. In particular, they amended the sales contracts with their distributors/retailers and removed the clause restricting resale prices in order to comply with the AML.
Suspected Breach of the AML
The NDRC’s probe into baby formula manufacturers may have certain connections with the melamine-tainted milk scandal in 2008. Since then, while demand for baby formula is booming, confidence in domestic products has plummeted. Chinese consumers have since flocked to overseas markets to buy foreign-brand baby formula and the product price – both in China and abroad – has increased considerably within a short timeframe. Such a price change has grabbed the attention of NDRC.
Based on limited public information, these baby formula manufacturers may have been involved in the following monopolistic activities:
· Article 14 of the AML prohibits price fixing for resale or setting minimum resale prices. The Moutai and Wuliangye case is the best illustration of this type of vertical monopoly agreement. As reported, the baby formula manufacturers are facing charges that include requesting distributors to sell their products at a price no less than the minimum price set by the manufacturers. The distributors that sold their products at a price lower than the fixed minimum price were punished. This practice could constitute a vertical monopoly and violate Article 14 of the AML, since such resale price maintenance could restrict competition in the relevant market and harm the interests of consumers.
· Article 13 of the AML prohibits horizontal monopolistic agreements and stipulates that, "for the purposes of this Law… monopoly agreements include agreements, decisions and other concerted conducts designed to eliminate or restrict competition". In light of this provision, the alleged price increase for the baby formula might constitute both horizontal and vertical monopolistic activity. It has been reported that the NDRC noticed a suspicious trend in recent years: one of the baby formula manufacturers would increase the price of its formula and the other manufacturers would in turn raise the price of their formulas. Different companies would take the lead at different times. If verified, this potentially collusive practice may constitute a concerted effort to eliminate or restrict competition.
Potential Legal Consequence
The AML stipulates that, "a fine of 1%-10% of the violator’s annual turnover plus confiscation of all illegal gains," will be imposed on companies engaging in a price-fixing monopoly. Based on the turnover of the investigated companies, the total fines may amount to billions of renminbi.
However, Article 49 of the AML provides that the specific fines shall be determined in consideration of the nature of the violation, the level of seriousness, the total timeframe of the illegal activity and other relevant matters. In consideration of the quick and cooperative response of these baby formula manufacturers, NDRC might suspend the investigation based on the assessment of the overall effect of their corrective measures on market competition and render a lightened penalty decision. In the Moutai and Wuliangye case, the antitrust agencies alleged that during the investigations, both Moutai and Wuliangye actively cooperated with the antitrust agencies by taking corrective measures (e.g. returning previously deducted guarantee deposits from distributors for selling at lowered prices and amending the distribution agreements in accordance with the AML). Consequently, each of the two companies was imposed with a relatively light fine in the sense that the fine is equivalent to 1% of the company’s sales in 2012. According to the AML, the fine could be as high as 10% of the violator’s annual sales under certain severe circumstances.
Also, Article 46 of the AML provides that an undertaking may obtain a reduced sanction or even immune from the sanction if the undertaking has voluntarily reported the relevant facts of entering into a monopoly agreement and provided important evidence to the antitrust agency subject to the antitrust agency’s discretion. Theoretically, this “leniency program” shall be applicable to both a horizontal monopoly and a vertical monopoly. Although in practice, whether and how the “leniency program” is applied in a vertical monopoly is yet to be tested. Nevertheless, the NDRC’s investigation might also involve a potential horizontal monopoly. The baby formula companies who claim the immunity or leniency shall demonstrate that they meet the relevant criteria under the AML.
As discussed above, although the companies’ recent price reductions and proactive cooperation with the NDRC may lead to lower fines, the NDRC is nonetheless expected to issue new record-high penalties. However, the individual penalty potentially imposed on each investigated baby formula might vary differently depending on the different circumstances. The progress of this high-profile investigation is being monitored closely and further details are expected.