The decision by China’s top economic planner to investigate five leading foreign infant milk companies for suspected antitrust violations may be part of a broader plan to boost consumption of the local product, analysts said yesterday.
Mothers turned away from Chinese milk powder in 2008 when infant formula tainted with the industrial compound melamine killed at least six babies and made thousands sick with kidney stones.
China has since made efforts to crack down on persistent food safety problems that have included chemical-laced pork and infant milk contaminated with cancer-causing agents.
Infant formula makers Nestle SA, Danone, Mead Johnson Nutrition Co and Abbott Laboratories said on Tuesday that they were being investigated by China’s National Development and Reform Commission for possible antitrust violations.
Analysts said the investigation could result in fines and tougher rules governing imports into an infant milk market set to grow to US$25 billion by 2017. The firms could face fines ranging from 1 percent to 10 percent of their annual sales, state-run Xinhua news agency quoted experts as saying.
“It is part of the whole idea of a consolidation process,” said Renee Tai (戴穎昭), a Hong Kong-based analyst at regional brokerage UOB Kay Hian Holdings (大華繼顯控股). “It is pointing the same direction of supporting local producers, making it difficult for importers.”
Several Chinese infant formula companies have started forming partnerships with foreign firms to try to boost brand recognition and gain technical know-how.
“Since consumer confidence in the Chinese products is seen as improving, it can be a chance [for Beijing] to test if confidence in local brands can hold its own against the foreign competition,” First Shanghai Securities Ltd (第一上海證券) chief strategist Linus Yip (葉尚志) said.
Foreign brands may also soon have to rely on their Chinese partners if they want greater access to the Chinese market.
The Chinese government has expressed an interest in bringing the supply chain under the control of Chinese firms as part of its goal of reducing the number of local infant formula producers to 10 from more than 200 within two years.
The Chinese Ministry of Industry and Information Technology said last month that integration of the milk powder industry was expected to involve 10 large companies with revenues exceeding 2 billion yuan (US$326 million( in two years, the China Daily said.
“They have to boost local consumption before they can proceed with the consolidation more smoothly,” said one retail analyst at a regional brokerage, who was not authorized to speak to the media.
As part of this consolidation, China Mengniu Dairy Co (中國蒙牛乳業) signed a second takeover deal last month to buy Carlyle-backed Yashili International Holdings (雅士利國際) in a deal worth about HK$12.5 billion (US$1.6 billion) as part of a plan to expand its milk powder business.
The Chinese Communist Party mouthpiece the People’s Daily said foreign and local players were equal before the law, but that foreign brands should not raise prices frequently without regard to the law and abuse their competitive advantage.
“From 2008, some foreign milk powder brands have increased their prices by up to 30 percent, nearly double that of local milk powder brands,” an editorial in the People’s Daily said, adding that if local brands raised standards and won trust, they could replace foreign brands as the favorites.