July 3 (Bloomberg) -- China’s probes of GlaxoSmithKline Plc and Danone highlight challenges for foreign companies in a market where they may be a bigger “prize” for regulators seeking to allay concerns that medicines and foods are unsafe.
The U.K. drugmaker is being probed for alleged bribery, while Danone, along with Nestle SA’s Wyeth brand, Mead Johnson Nutrition Co. and Abbott Laboratories, are under investigation for pricing that may have violated anti-monopoly laws.
Scandals including contaminated milk powder and rat meat sold as mutton have fueled demands for the government to crack down on safety violations. Apple Inc. and Yum! Brands Inc. are among foreign companies that have had to apologize this year to consumers in the world’s second-biggest economy after Chinese authorities began investigating their operations.
“Everybody is being targeted, but I think it’s more of a prize or its something you can emphasize a lot more in media when you find foreign companies are doing it as well,” said James Roy, an analyst at China Market Research Group. “Foreign companies operating in China have to be careful.”
Premier Li Keqiang, who took office in March, has pledged to root out consumer abuses. Chinese authorities ordered Volkswagen AG to recall vehicles for a defective gearbox system a day after Li was named premier. Apple Chief Executive Officer Tim Cook issued a public apology on April 1 after the company was lambasted by Chinese state media for arrogance and poor customer service. In January, Yum Vice Chairman Sam Su apologized for a food safety scandal involving a former supplier.
China, the world’s biggest market for cars, personal computers and mobile phones, is becoming a more difficult place to do business, according to foreign companies in the nation. More than two thirds of member companies that responded to a survey by the American Chamber of Commerce in Shanghai released in February said the regulatory environment was either “not improving” or “deteriorating.”
A senior Glaxo finance executive in Shanghai and employees in Beijing were detained as part of a corruption investigation, the South China Morning Post reported on July 1, citing an unidentified person from Shanghai’s drug industry. Simon Steel, a Glaxo spokesman in London, declined to comment on June 30 about whether any staff have been arrested or detained.
Police in the southern city of Changsha said June 28 that senior Glaxo China executives were suspected of economic crimes and were being investigated, without elaboration. The company is unclear about the nature of the investigation, Steel said.
An anonymous tipster made allegations that Glaxo’s sales force in China was involved in widespread bribery of doctors to prescribe medication, in some cases for unauthorized uses, between 2004 and 2010, the Wall Street Journal reported June 13. Glaxo found no evidence of wrongdoing after a four-month probe into a whistle-blower’s claims of corruption and bribery, the London-based company said at the time.
China’s efforts to strengthen its health care system has included stamping out corruption. Last year, seven managers and directors of key public hospitals in the city of Shenzhen were given jail sentences for taking kickbacks, the China Daily newspaper reported in October.
Siemens AG, Europe’s largest engineering company, was sued earlier this year by a former compliance officer in its China unit who claimed he was fired after exposing evidence of hospital kickbacks.
Danone, Nestle’s Wyeth brand, Mead Johnson, Abbott Laboratories, Dutch producer Royal FrieslandCampina NV as well as local firm Biostime International Holdings Ltd. are being investigated by the National Development and Reform Commission, China’s top economic planning agency, for pricing of their infant formula, the official People’s Daily reported yesterday.
The NDRC has evidence the companies sold products at high prices in China and their prices have increased about 30 percent since 2008, according to the newspaper, which is published by the Communist Party.
The agency didn’t answer at least five calls or respond to a fax seeking comment on its investigation.
The companies probed may face possible fines of between 1 and 10 percent of their revenue if found guilty by the NDRC, the China Securities Journal reported today, citing unnamed experts on the anti-monopoly law.
Biostime hasn’t received any official feedback or information on possible penalties from the NDRC, Jason Xu, the firm’s assistant chief financial officer, said over the phone today.
Biostime’s Hong Kong-listed shares declined for the third day today, falling as much as 19 percent to HK$35, the most since its listing in December 2010.
A melamine-tainted milk powder scandal in 2008 that killed at least six infants has fanned distrust among Chinese consumers of local milk and driven their purchases of foreign brands at home and overseas.
“We view news of a price probe as being a warning shot across the bows of the industry and something that will put a lid on any near-term price increments,” said Jeff Stent, an analyst at Exane BNP Paribas in London. “We need to remember that this is a phenomenon driven by consumers rightly having little confidence in the safety of the domestic milk supply.”
Danone, Mead Johnson and Nestle said they are cooperating with the authorities. Jan-Willem ter Avest, a spokesman from Royal FrieslandCampina, said in an e-mail that the company is fully cooperating with the government to comply with pricing policies and regulations. A spokesman for Abbott couldn’t be reached for comment.