China’s first antitrust law may be less than five years old. But, like many a toddler, it has a powerful way of making its presence felt. This week, Danone and Nestlé agreed to cut the price of infant formula milk in China after local regulators launched an investigation into possible anti-competitive behaviour in this market. On Thursday, a probe into drug industry pricing appeared to have embroiled a number of multinationals, including UK-based GlaxoSmithKline.
Investors may take some comfort from the fact that the direct impact on the two consumer goods companies will be modest. Danone and Nestlé benefited after a 2008 contamination scare turned mothers in China off local infant milk powder. Even so, their own milk sales there are a small slice of total group revenues – probably under 5 per cent at Danone and less than 2 per cent at Nestlé. Citibank reckons that if Danone takes a 10 per cent price cut – it has not detailed the amount – forward earnings might fall by 1 per cent. Earnings damage at Nestlé should be “almost immaterial”. Still, investors in paediatric nutrition group Mead Johnson, co-operating with the same probe, may be less sanguine: its shares shed one-tenth this week.
The real issue is whether this is the thin end of an antitrust wedge for multinationals in China. When the anti-monopoly law came in, the initial focus was on merger control. But the two agencies policing market behaviour have been steadily ramping up, too. Armed with rules on supplier/distributor pricing as well as cartels, the National Development and Reform Commission has spread its caseload from local drug companies and noodle makers to international groups – witness January’s stiff fines on LCD makers. Foreign companies, so excited about China’s potential, should be alert to growing pains.