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News Analysis: Baby formula price probe to shakes or reshapes industry?

By Rong Jiaojiao (Xinhua)

20:11, July 04, 2013

BEIJING, July 4 (Xinhua) -- A probe into possible price fixing by foreign and domestic baby formula firms will lead to the consolidation of the dairy sector, experts have said.

The National Development and Reform Commission (NDRC) is investigating foreign baby formula companies, including Nestle, Mead Johnson and Wyeth, as well as domestic company Biostime, over alleged anti-trust violations.

The companies are believed to have a monopoly in the Chinese market and have been accused of violating anti-monopoly laws via high prices and limited market competition, according to the NDRC.

The NDRC said it will continue the probe, warning that companies that are found to have violated the law will be punished and could face fines ranging from 1 to 10 percent of their annual sales.

Nestle, Wyeth and Mead Johnson have confirmed that their companies have been actively cooperating with the investigation.

Wyeth announced Wednesday that it will cut prices for some of its baby formula products by an average of 11 percent, as well as freeze prices on all new products for the next year. The price cuts will take effect on July 8, the company said.

Biostime said in a Tuesday statement that it is cooperating with the investigation and has decided to adjust its sales and marketing practices following the inquiry.

Wang Dingmian, a researcher who has tracked the dairy industry for years, said the probe provides an opportunity for domestic dairy companies to speed up restructuring and improve competitiveness by producing trustworthy products with affordable prices.

Demand for baby formula is booming in China, but confidence in domestic brands has plummeted since 2008, when melamine-tainted milk killed six infants and sickened 300,000 others.

Chinese from the mainland have since flocked to Hong Kong and other overseas markets to buy foreign-brand baby formula over safety concerns about domestic dairy companies.

Statistics from AC Nelson, a New York-based market survey and research company, showed that four foreign brands, including Mead Johnson and Wyeth, accounted for about half of the total sales of baby formula in the Chinese market in 2012.

Some foreign brands have increased their prices by up to 30 percent since 2008, with some prices reaching nearly twice as much as domestic brands, according to the NDRC data.

At supermarkets in big cities like Beijing, a 900-gram container of baby formula made by an international firm costs between 200 yuan (32.4 U.S. dollars) and 280 yuan, compared to about 100 yuan for domestic baby formula in smaller cities.

The NDRC probe is a warning for foreign formula companies whose practices have hindered market competition, as well as consumers' interests, Wang said.

However, the investigation will not necessarily ensure a promising future for domestic dairy companies, said Chen Lianfang, a senior dairy analyst with CnAgri, a Beijing-based agriculture consulting company.

"Price cuts for foreign baby formula will only create a limited profit margin for domestic companies, as the cost of production is still rising and domestic productivity remains low," Chen said.

As of May, China had 127 baby formula producers with a combined annual output of 600,000 tonnes of formula. Only three of the companies produce more than 30,000 tonnes annual.

China imported 240,000 tonnes of infant formula in the first quarter of this year, up 23.7 percent from the same period of last year, indicating consistently huge demand from Chinese parents for foreign-branded baby formula, data from the General Administration of Customs showed.

To reduce the country's reliance on foreign infant formula, Chen said, the price probe should be followed by industry consolidation and government supervision in order to restore market confidence in domestic baby formula.

China Mengniu Dairy Co., Ltd. has taken the first step to regain consumer confidence in the wakes of safety scandals surrounding the country's milk and infant formula industry.

The company signed a deal in mid-June to buy Guangdong-based Yashili International Holdings Ltd. for over 11 billion Hong Kong dollars (1.42 billion U.S. dollars), marking the most costly merger in China's domestic dairy sector.

Also, the government has taken a series of measures, such as encouraging technological restructuring and establishing a quality assurance system, to improve the quality of domestic baby formula.

"The most effective way to boost the dairy sector is to improve the quality of its products and raise public confidence in domestic formula producers," Chen said.

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