WRAPUP 2-China fines milk powder makers $110 mln for price fixing

Wed Aug 7, 2013 1:21am EDT

* China says firms fined for restricting competition, disrupting market

* Mead Johnson fined $33 million, Danone $28 million

* Nestle, others escape fines for carrying out "self-rectification" - Xinhua

* Infant milk market in China to be worth $25 billion by 2017

By Kazunori Takada and Anne Marie Roantree

SHANGHAI/HONG KONG, Aug 7 (Reuters) - China fined six companies including Mead Johnson Nutrition Co, Danone and New Zealand dairy giant Fonterra a total of $110 million following an investigation into price fixing and anti-competitive practices by foreign baby formula makers.

The other three penalised were Abbott Laboratories, Dutch dairy cooperative FrieslandCampina and Hong Kong-listed Biostime International Holdings, the National Development and Reform Commission (NDRC) said on Wednesday.

The fines, announced just over a month after the NDRC said it was conducting the antitrust review, coincide with separate pricing investigations into foreign and local pharmaceutical firms as well as companies involved in gold trading. Those probes have yet to conclude.

The official Xinhua news agency said the fines were a record for China, although it did not elaborate.

Foreign infant formula is coveted in China, where public trust was damaged by a 2008 scandal in which six infants died and thousands of others were sickened after drinking milk tainted with the toxic industrial compound melamine.

Foreign brands account for about half of total sales and can sell for more than double the price of local formula. The infant milk market in the world's second biggest economy is set to grow to $25 billion by 2017.

The NDRC said in a statement the fines were for restricting competition, setting curbs on minimum prices for distributors and for using a variety of methods to disrupt market order.

Swiss giant Nestle, Japan's Meiji Holdings and Zhejiang Beingmate Scientific Technology Industry and Trade Co Ltd were not punished because "they cooperated with the investigation, provided important evidence and carried out active self-rectification", Xinhua said, citing the NDRC.

The commission fined Mead Johnson 203.8 million yuan ($33.29 million); Danone 172 million yuan; Biostime 162.9 million yuan; Abbott 77 million yuan; FrieslandCampina 48 million yuan and Fonterra 4 million yuan.

Mead Johnson, Biostime, Abbott and Fonterra said they would not contest the penalties. Officials at French food group Danone and FrieslandCampina were not immediately available to comment.

After the NDRC probe was announced, a number of companies including Mead Johnson, Danone and Nestle cut prices on their baby formula in China by up to 20 percent.

Analysts said the probe was possibly part of a broader Chinese plan to boost consumption of local infant milk products.

But they said the fines were unlikely to damage the reputation of the affected companies. If anything, foreign infant formula makers might increase their market share because of the price cuts.

"It will have an impact on domestic brands over the long term as the prices of high-end premium brands come down. Customers will tend to buy the foreign brands as the price gap between domestic and foreign brands narrows," said Jacqueline Ko, an analyst at Maybank Kim Eng Research.

Fonterra, the world's biggest dairy exporter, said it would give additional training to sales staff and review its distributor contracts in the wake of its fine.

"We believe the investigation leaves us with a much clearer understanding of expectations around implementing pricing policies," Kelvin Wickham, president of Fonterra Greater China and India, said in a statement.

Fonterra is embroiled in a separate milk powder contamination scare that has led to product recalls in China, Hong Kong and elsewhere in Asia.

POWERFUL COMMISSION

A source with direct knowledge of the China investigation said the NDRC was concerned with manufacturers suggesting retail prices to distributors and then offering incentives if these were met, believing this was tantamount to dictating retail prices.

The agency also told the firms they had inhibited fair competition by setting up regional distributors and discouraging them from selling outside their territories, said the source, who spoke on condition of anonymity because he was not allowed to speak to the media.

The commission is one of China's most powerful government bodies, with a role in overseeing prices as well as broad economic policies.

The milk sector is still relatively young in China, with consumption of dairy products growing at an annual compound rate of 20 percent, a contrast to U.S. and European markets where demand has been shrinking in the past decade.

Some analysts also said the pricing investigation could result in tougher rules governing imports.

Indeed, the China Food and Drug Administration is proposing tightening conditions for the granting of licences for milk powder production, including requiring producers to have their own controlled milk sources and research and development capabilities.

In a statement late on Tuesday, the regulator said it was seeking public comment on the proposals, which also include requirements for license holders to strengthen hygiene practices and management standards.

Mead Johnson said its fine would reduce its full-year earnings by about 12 cents per share, but it reiterated its 2013 earnings forecast for profit, excluding one-time items, of $3.22 to $3.30 per share.

Shares of Biostime, which has a market value of $3.3 billion, were up 5.3 percent at midday, beating a 0.3 percent drop in the benchmark index. It shares resumed trading after being suspended the day before.

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