Authored by Dr. Zhan Hao (zhanhao@anjielaw.com), Dr. Annie Ying Xue (xueying@anjielaw.com)

The hefty fines on LCD panel manufacturers and top distilleries may have served as a harbinger for the next step antitrust enforcement actions of NDRC which target multinationals and vertical price fixing. The recently unveiled anti-monopoly probes into vertical price fixing of infant milk formula (IMF) producers are cases to the point. The ten companies under investigation are suspected of having committed vertical price-fixing, and among them eight are leading international brands.

Antitrust dawn raid driven by soaring price of IMF products

It is reported that NDRC launched anti-monopoly investigation as early as in May of this year because of the increasingly high prices of IMF products. Since the 2008 melamine scandal, the cumulative price increase of the investigated companies has reached over 30%; moreover, it is said that the retail prices of some imported baby formula products are more than twice of the prices of the same-brand and equally packaged products sold outside China.

Unnamed NDRC officials claimed that there are three ways in which IMF producers can manipulate and raise the price of baby formula products:

1.      Some companies involved impose direct pecuniary punishment on distributors who do not follow the pricing policies of the producers;

2.      Some will discipline the dissenting distributors by threatening refund cut or halting supplies;

3.      Although they are aware of antitrust legal risks, companies still warn their staffs not to communicate with written materials and thereby leave hard evidence. Instead, communications via emails or oral communications are encouraged.

Government intervention: is it really a solution?

Even though the antitrust authority was not sure if the alleged vertical price-fixing was the single cause or was the most significant reason for the current high prices of IMF products sold in China, it threw out multiple dawn raids anyway.

Due to China’s current state in its developmental stage and its large land size, half of the retail price is in fact used to pay for channels in the IMF sector. It is highly in doubt whether efforts merely made by a link of the long chain will make sustainable difference.

It seems that NDRC is somewhat aware of the ecology of the IMF sector. On July 5, Fonterra, the New Zealand dairy giant which controls 90% of milk sources of New Zealand and provides half of the imported raw milk materials to China, confessed that it has lately been under anti-monopoly investigation by NDRC.

Even if the prices of the IMF products really drop, the consumers may not buy them, and the one-shot price cut may not last long. The 2008 melamine scandal has ironically left price almost always secondary to quality in the mind of Chinese consumers. Without substantial regulatory reform, it is hard to expect that consumers will give up price as the easiest proxy for quality. Furthermore, in May and June, the central government came up with two polices aiming to control the imported baby formula products and to restructure the IMF industry. These measures are likely to cut the supply of imported milk powder product while its demands are increasing steadily. The projected sagging supply together with the profit loss forced by the present investigation may culminate in retaliatory price rise in the months to come.

An integral portion of a comprehensive strategy to boom domestic IMF industry?

The 2008 melamine scandal marked the ignominious defeat of the Chinese IMF producers. Before 2008, the market share of international brands was about 30%; in contrast, international brands’ market share was raised up to 50-60% in average, and 80% in high-end IMF market regardless of the 30% price increase.

Determined to reenergize the domestic IMF makers, the central government put forward a comprehensive framework to strengthen safety of IMF products and thereby restore consumers’ confidence at a State Council standing conference held on May 31. The framework included concentration of IMF producers, application of traceability system, special inspection movement, and tightened supervision. In response to the call from the State Council, Ministry of Industry and Information Technology (MIIT) rolled out the Action Plan for Improving Milk Powder Products and Enhancing Consumers’ Confidence on June 4. Twelve days later on June 16, MIIT, China Food and Drug Administration, Ministry of Public Security, Ministry of Agriculture, Ministry of Commerce, National Health and Family Planning Commission, General Administration of Customs, State Administration for Industry and Commerce, General Administration of Quality Supervision, and Inspection and Quarantine jointly made Opinions on the Work of Further Strengthening the Quality of Baby Formula Products.

As a powerful economy planner, NDRC plays a dual-faced role in formulating industrial polices and enforcing competition rules. Although it is too soon to tell whether the present investigation is an integral portion of a comprehensive strategy to boom domestic IMF industry or not, the lack of transparency and persuasive evidence to prove the alleged antitrust violation will only spur more association with state intervention.