Foreign milk powder and pharmaceutical companies in China have fallen under intense scrutiny from Chinese authorities following a series of antitrust and anti-corruption probes. Over thirty foreign companies have been investigated for price-fixing activities or bribery.
In 2008, the Chinese domestic milk industry was rocked by the “poison milk powder” scandal, which involved the deaths of six infants and thousands more falling ill as a result of drinking milk products tainted with the toxic chemical compound melamine. The resulting damage to the image of domestic producers increased local demand in and trust for foreign dairy providers. In March of this year, the Chinese government began an investigation into potential anti-competitive behavior and price fixing in the wake of the 2008 scandal. Soon after, foreign players Mead Johnson, Dumex and Wyeth Nutrition cut their prices by about 20 percent.
In August, the National Development and Reform Commission (NDRC) issued fines totaling $109 million for anti-competitive behavior and price fixing by six companies that sell infant milk powder in the Chinese market. It is the largest fine the Chinese government has ever issued for violation of its antitrust law. Of the six companies – namely Mead Johnson Nutrition, Abbott Laboratories, Dumex Baby Food, Royal FrieslandCampina, Fonterra Co-operative Group and Biostime International – five are foreign and one is based in Hong Kong. Three other companies in the industry, including Wyeth Nutrition, Zhejiang Beingmate Technology Industry and Trade Company, and Meiji Holdings, were exempted from the fines due to their cooperation with the investigation.
Dumex has also been accused of bribing hospital staff with payments of up to 10,000 yuan ($1,634) in the form of “sponsorship fees” in the northern city of Tianjin to promote its baby formula, according to China Central Television (CCTV). Dumex was reportedly “extremely shocked” by the allegations and stated that it would immediately start an investigation on this issue.
These claims came amid Chinese authorities’ investigation of alleged corruption and bribery in China’s $350 billion healthcare market. The initial focus of the investigation has been British drug-maker GlaxoSmithKline (GSK), though Chinese authorities have since extended the probe to other drug companies including Eli Lilly, Novartis and Sanofi.
In July, four GSK executives in China were arrested in connection with alleged payouts to doctors and officials exceeding RMB 3 billion. GSK CEO Sir Andrew Witty has conceded to compliance failings in China, though the company maintains that the main company office was not aware of the illegal behavior and asserts that the practices were the actions of “a number of individuals that have worked outside
The charges against GSK could result in substantial fines in China and have caused some to speculate that the company may leave the Chinese market altogether. Further woes may await GSK outside of China, as U.S. authorities have added violations of Chinese anti-bribery laws to the scope of its investigation of the company and other pharmaceutical industry players under the U.S. Foreign Corrupt Practices Act.
The automobile, telecommunications, banking, and oil and gas industries may be the next targets for antitrust and anticorruption probes. Although an NDRC official was quoted anonymously as stating that “[their] investigations focus on monopolistic conduct, not the entities behind it,” Davide Cucino, president of the EU Chamber of Commerce in China, has suggested that Chinese businesses were the beneficiaries of “partisan treatment” from the government, a sentiment echoed by the American Chamber of Commerce. Whether or not foreign firms are preferentially targeted by the Chinese government for such investigations, it is clearly in the best interests of companies to reduce exposure by strengthening legal compliance and emphasizing sound internal controls going forward.