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China fines milk powder makers $110 million for price fixing

By Kazunori Takada and Michael Martina

SHANGHAI/BEIJING (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, which follow a four-month antitrust probe by the NDRC, coincide with separate pricing investigations into 60 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.

"These are really significant fines for China, which has typically not issued large fines for antitrust violations," said Peter Wang, an antitrust expert and Shanghai-based partner for law firm Jones Day.

Foreign infant formula is coveted in the world's second biggest economy, where public trust was damaged by a 2008 scandal in which six infants died and thousands became ill 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 China is set to grow to $25 billion by 2017 from $12.4 billion in 2012, according to data from Euromonitor.

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.

It fined U.S.-based Mead Johnson 203.8 million yuan ($33.29 million); French food group Danone 172 million yuan; Biostime 162.9 million yuan; Abbott 77 million yuan; FrieslandCampina 48 million yuan and Fonterra 4 million yuan.

All of the companies said they would not contest the penalties.

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 quoted Xu Kunlin, the head of the NDRC's price department, as saying.

Xu said the probe began in March, but was only made public in early July. 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.

Chinese firm Biostime was fined the equivalent of 6 percent of its 2012 China sales, the highest of those penalised, because it "seriously violated the anti-monopoly law and failed to actively take corrective action", Xu said. Biostime imports most of its products.

Mead Johnson, the maker of Enfamil formula, was fined the equivalent of 4 percent of its 2012 sales because it "did not actively cooperate with the investigation but did take active self-rectification measures", Xu added.

Danone, Abbott, FrieslandCampina and Fonterra were each fined 3 percent of last year's sales after they cooperated in the probe and corrected improper practices.

"As a good corporate citizen, we are committed to addressing the concerns raised by the government and authorities in the market in which we do business and will comply with the fine stipulated by the NDRC," FrieslandCampina said in an emailed statement.

FOREIGN FIRMS NOT HURT

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.

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

Wang from Jones Day said that while a Chinese firm got the biggest rap on the knuckles, foreign companies were clearly no longer insulated from NDRC investigations.

"It is a shift in that the foreign companies are so prominently being pursued. But that is normal. That is the way you would expect the antitrust system to mature," Wang said.

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.

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 licence 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.

($1 = 6.1217 Chinese yuan)

(Additional reporting by Lisa Baertlein in Los Angeles, Martinne Geller and Bill Berkrot in New York, Toni Clarke in Washington, Jonathan Standing and Li Hui in Beijing, Alexandra Harney in Shanghai and Anne Marie Roantree in Hong Kong Writing by Kazunori Takada; Editing by Dean Yates and Ron Popeski)

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