China Fines Dairy Companies a Joint $109 Million in Price Probe

China fined six dairy companies a combined $109 million for milk-powder price fixing, a record penalty for violating anti-monopoly laws.

China fined six dairy companies including Mead Johnson Nutrition Co. and Danone a combined 669 million yuan ($109 million) for price fixing, a record penalty for violating anti-monopoly laws.

The companies tried to fix minimum resale prices of their products, limiting competition in the industry, China’s National Development and Reform Commission said in a statement today.

Abbott Laboratories, Royal FrieslandCampina NV, Fonterra Cooperative Group Ltd and Guangzhou-based Biostime International Holdings Ltd. were the other producers named by the NDRC for breaking anti-monopoly rules. The penalties reflect the increased scrutiny that local and global corporations are facing from Chinese regulators.

This is a "very significant fine that will catch everybody’s attention," said James McGregor, Greater China chairman of business consultancy APCO Worldwide Inc. "The Chinese are getting aggressive on pricing, market dominance, mergers and acquisitions, all at the same time."

The official Xinhua News Agency said combined amount of the fine was a record for anti-monopoly violations.

Mead Johnson will pay a fine of 203.8 million yuan, Danone’s Dumex unit will pay 172 million yuan and Biostime 162.9 million yuan. Frieslandcampina’s penalty is 48 million yuan, Abbott’s penalty is 77.3 million yuan and Fonterra’s is about 4.5 million yuan, the NDRC said.

Foreign Milk

Biostime, whose shares were suspended yesterday, rose 6.5 percent in Hong Kong trading today, for the highest level since June 27. Mead Johnson closed 1 percent lower at $77.27 in New York yesterday.

The investigation into price fixing was first announced in a July 2 article in the Communist Party’s official People’s Daily newspaper, which said the NDRC had evidence showing foreign milk powder prices had increased about 30 percent since 2008. That year milk powder contaminated with the chemical melamine killed at least six infants.

Several baby formula producers cut prices of key products in China last month, with Danone and Nestle reducing some prices by as much as 20 percent within days of the investigation being announced. Mead Johnson announced its own cuts on main products in the country by up to 15 percent on July 10.

Price Competition

The NDRC, China’s top economic planner, said today that the companies had punished resellers who did not follow prices suggested by manufacturers through fines or restricting supplies. These moves weakened competition, the NDRC said.

The dairy producers said they would stop all illegal activities immediately and amend existing resale contracts to comply with China’s laws, the government agency said.

Mead Johnson said it won’t contest the penalty. The company said the penalty will shave 2013 earnings per share by about 12 cents. Biostime said it would continue to "improve its internal control system."

Danone said its Dumex unit respects the penalty decision and is committed to "long-term" development in China, according to an e-mailed statement. Dumex "will continue to comply with applicable Chinese law and regulations for production and operation," it said.

Probe Cooperation

Nestle SA’s Wyeth brand, Zhejiang Beingmate Technology Industry & Trade Co. and Meiji Holdings Co. were also investigated, the regulator said, and were exempt from punishment because they cooperated with the probe, provided important evidence and carried out active "self- rectification."

Zhejiang Beingmate, the listed company of China’s second- largest baby formula maker, gained as much as 4.6 percent in Shenzhen today. Wyeth will improve its sales and marketing practices on the mainland following the probe and continue to implement the price cuts announced last month, the company said in a statement today.

Mead Johnson is the largest baby formula company in China with a 14 percent market share last year, according to industry researcher Euromonitor International. Hangzhou Beingmate Group Co. ranked second with a 10 percent share, followed by Danone’s 9.2 percent.

Earnings Impact

The fines come as Chinese consumers are still reeling from product recalls by Dumex and Abbott over the weekend linked to a warning issued by Fonterra with regards to a tainted raw material. Auckland-based Fonterra found bacteria causing a rare illness called botulism in about 38 metric tons of whey protein concentrate it produced, it said this week.

The China Food and Drug Administration has said it plans to increase standards for domestic infant-formula producers. Under draft regulations subject to public comment, producers would have to own milk sources and have research and development capability, the agency said.

"Baby formula and milk powder has been such a series of scandals here," APCO’s McGregor said. "They want to bring alignment and have people buying local milk powder again."