Watchdog bites with no favor(2)

Xiaowei Rose Luo, associate professor of entrepreneurship and family enterprise at Insead, one of the world's largest business schools, with campuses in Europe, Asia and the Middle East, says that despite the concerns, the recent investigations are a sign of the stronger enforcement of antitrust laws and deepening market transition in China.

"If you look at the ratio of international firms and domestic firms being investigated, you may get the impression that multinationals have a larger share," Luo says.

"Since the inquiries are a recent phenomenon and the enforcement is getting stronger, it is too early to use the ratio to make such conclusions. I would rather prefer to look at it more qualitatively. Some high-profile domestic jewelry and liquor firms have also been investigated and fined," says Luo, whose research has focused on how unique conditions in emerging economies can affect corporate strategies and performance.

In August, five foreign milk powder makers were fined $110 million (83 million euros) by the National Development and Reform Commission for violating contract laws with distributors and for ensuring minimum resale prices. In the same month, authorities imposed fines totaling 10.6 million yuan ($1.7 million; 1.3 million euros) on five local jewelry retailers for price manipulation. In February, Chinese premium liquor makers Kweichow Moutai Co Ltd and Wuliangye Yibin Co Ltd were fined 449 million yuan for setting minimum resale prices.

NDRC officials say investigations in other sectors are also underway, but refused to be more specific because of the complexity of enforcing anti-monopoly laws.

"Investigations against domestic companies seem to be on a much smaller scale when compared with foreign companies," Waterman of the US Chamber of Commerce says. "This is what we are watching closely. However, we also support China's right to have a strong antitrust regime, as we think it is the basis for modern market-based economies.

"The question now is whether the authorities will use the same yardstick for domestic and foreign companies. This is a big question and we don't know the answer. We have heard rumors that there may be some forthcoming enforcement actions against state-owned enterprises, but we haven't seen it yet."

Price factor

Bala Ramasamy, professor of economics at the Shanghai-based China Europe International Business School, says that measuring foreign and domestic firms with the same yardstick may be out of the question. "The NDRC is a state agency, so investigations against state-owned enterprises may not be done in the public domain, considering that China's social and economic context is different from that of the West.

"The public is not too aware of such investigations as they are often done within the government framework," says Ramasamy, whose teaching focus at CEIBS is international business strategy. He says there is sound logic on why most of the companies being investigated are multinationals.

Ramasamy says that in the 1980s and even 1990s, the foreign investment that came to China was for exports. "In the past, the Chinese government was not too concerned about price-fixing, because the majority of the companies came to China to use the resources, such as labor. The large proportion of what they produced in China was for exports.

"Over the past several years, with the growing market in China, more and more multinationals are beginning to look at the Chinese market. That's why we are going to see more cases involving multinational companies."

The investigations are being conducted to protect the Chinese market and to make sure Chinese consumers pay the right price for the right-quality products, Ramasamy says.

"Do I see more kinds of investigation happening? Definitely, as more investors are coming to China to tap the Chinese market."

Echoing similar views are James Roy, a senior market analyst with the Shanghai-based Market Research Group. Roy says the Chinese government is under great pressure to provide people the access to affordable prices, and the price differences between the same product being sold in China and other countries have often led to huge desire among Chinese to buy products from abroad.

Citing an example, he says a basic iPad 2 costs $488 in China, whose average per capita income is about $7,500. The same product costs $399 in the US, whose average per capita personal income is more than $42,000.

Clothing and other apparel are on average 70 percent more expensive for consumers in China than in the US, according to data provided by SmithStreet, a Shanghai-based strategy consulting and corporate advisory firm, which compared the prices of 500 items across 50 brands in both countries.

The huge demand to buy genuine high-quality infant formula at relatively low prices has also created an industry named daigou, an Internet-based business in which overseas Chinese act as shopping agents for those who are based in China.

Wang Huainan, CEO of Babytree.com, one of China's largest mother-and-baby online communities, says that whether or not the foreign baby formula companies violate the law or not, the retail price of foreign infant formula sold in China can often be twice that of the same product in other countries.

"Some of the foreign-branded milk is produced locally in China with ingredients imported from home countries, while some others export their final products directly to China. But the tariff China charges on imported dairy products is only about 4 percent of the price, so high tax is obviously not the reason for huge price differences," Wang says.

He also says China's domestic baby milk producers raised their prices by about 6 to 7 percent every year, whereas their foreign counterparts raised prices by 10 to 20 percent every year.

However, Roy of the China Market Group says pricing is an important part of a company's branding strategy, so every company should have the right to set their price differently in different countries.

"Our research finds that in many cases people have a lot of uncertainties about what they are buying. Price is often an ideal indicator to show what is good and what is not good. Producers don't charge very high prices, but only what the market can bear."