Formula firms face price probe

Several infant milk formula producers, mostly foreign, are under an anti-trust investigation by China's top economic planner for allegedly fixing prices, the official People's Daily reported on Tuesday.

The National Development and Reform Commission is investigating baby formula companies including Nestle SA, Abbott Laboratories, Mead Johnson Nutrition Co, Danone's Dumex brand and Wyeth Nutrition.

Also under investigation is a local company, Biostime International Holdings Ltd.

The companies are believed to have a monopoly and pursue anti-competitive practices in the market, the report said, quoting the agency's price monitoring and anti-monopoly unit.

The NDRC has evidence that these companies charged higher prices in the Chinese market, with price increases of about 30 percent since 2008, according to the newspaper.

Nestle told China Daily on Tuesday that it has been cooperating with the government's investigation. Li Yuanying, external affairs supervisor of Mead Johnson in China, on Tuesday in an e-mail confirmed the probe by the NDRC. Li declined to make any comment because of the ongoing investigation.

"But we will continue to work in accordance with the government's requirements," the e-mail said.

Wyeth Nutrition China-based spokeswoman Winnie Wang also confirmed the investigation and said the company was cooperating.

The other companies could not immediately be contacted for comment.

Concerns about the safety of domestic milk powder, especially after a melamine-tainted milk powder scandal in 2008 that killed at least six children and sickened about 300,000 others, have fueled Chinese demand for foreign infant formula.

Media reports have said that foreign brands now account for about half of total sales in China.

The investigation also came to light after Biostime, a domestic infant formula maker, filed a statement last week in which the company said its wholly owned subsidiary in Guangzhou was under investigation for allegedly managing the market sales prices of the distributors and retail sales organizations.

Ma Wenfeng, a senior analyst at Beijing Orient Agribusiness Consultant, said the government's intervention is likely to cause a "butterfly effect", further leading to an industry consolidation, but to what extent the government will punish those companies remains unclear.

"Naturally milk pricing should be a market activity rather than a government intervention," he said.

"But current retail prices for many imported milk powders don't reflect their real prices, so it is natural for the government to protect the legitimate interests of consumers and further consolidate the industry."

The government has pushed local dairy companies to consolidate the milk formula industry, enhance the industry's competitiveness and create strong domestic brands.

Gao Fu, an official at the Ministry of Industry and Information, said last month that he hopes to see the creation of 10 large companies in the industry within two years, each with annual revenue of more than 2 billion yuan ($326 million), taking up 70 percent of the industry.

Last month, China Mengniu Dairy, the country's largest dairy producer, acquired more than 75 percent of another major dairy producer, Yashili International Holdings. Industry analysts expect more industry mergers.

Wang Dingmian, executive council member of the Dairy Association of China, said the problem with China's dairy industry is lack of trust in domestic dairy products.

This situation has driven up the price of infant formula products, especially those labeled as having been produced overseas.

"Boosted by increasing market demand, foreign baby formula companies raised their prices every year," Wang said.

"Now, the market consensus is that China has become the country with the most expensive infant milk in the world."

The price of imported milk powder in the domestic market is enough to buy three or four cans of milk powder abroad, leading to Chinese buyers rushing for goods overseas.

The government has released a series of policies including technological restructuring and adopting stricter management standards to supervise the baby formula industry and ensure food safety and restore consumer confidence in the industry.