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Chinese Regulatory Agencies Step-Up Multi-Industry Probes

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Chinese regulatory agencies have launched three separate investigations across separate industries, all in a matter of a week.  Supply chain teams need to remain diligent to the potential short and longer-term implications of these probes.

First was a probe involving the pricing practices of over 60 pharmaceutical and drug companies, either indigenous to China or foreign-owned.  Multinational firms that were reported to be involved included U.S. based Merck, U.K. based Glaxo-SmithKline and Japan based Astellas among a group of smaller firms. This probe is similar to other emerging market and developed economy probes that strive to keep a lid on explosive drug costs within their nations.

That was followed by a highly visible country-wide pricing investigation involving baby formula makers. A continuing implication of the 2008 melamine milk scandal has been a known fact that Chinese consumers continue to no longer trust Chinese milk and baby formula producers leading to a boom in foreign based brands that have stricter controls on the dairy supply chain. These foreign brands are in such demand that the government has been forced to institute buying controls to avoid hoarding and price speculation. The brands themselves have garnered a premium pricing. According to business media reports, the latest probe involves checks of manufacturers, wholesalers and retailers and especially any efforts from manufacturers to place price thresholds at the retail level.  The Financial Times reported last week that Nestle agreed to slash prices in China by up to 20 percent immediately after investigators announced the baby formula probe. It further reported that sales of foreign baby formula brands have grown more than 20 percent annually since the 2008 scandal, and is expected to double again in the five years.

The latest reported probe is an antitrust investigation against food companies with European maker Tetra Pak as the initial target.  Reports indicate that company officials acknowledged that Chinese regulators are seeking additional information but that no formal notice of investigation has been received.

Industry and Chinese legal watchers were quick to point out to FT that the latest probes are more about efforts to curb rising inflation and demonstrate to Chinese consumers that the government is looking after their interests.  However, the new involvement of China’s State Administration for Industry and Commerce (SAIC), the agency responsible for registering industrial and commercial companies is a more concerning sign of regulatory activism.

The takeaway for supply chain and product management teams is to expect additional fallout from this new phase of regulatory activism.  Consumer markets across China have been a source for growing revenues and profits, offsetting declines in certain other troubled economies such as the Eurozone countries.  Increased scrutiny often leads to further regulatory conditions and China has demonstrated in previous actions that it will protect its domestic corporate brands and supply chains.

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