"The Chinese baby formula industry was dealt another major blow when news broke which further highlights the corruption permeating all levels of this industry."
The hugely lucrative formula market in China is dominated by foreign imports, a fact which has prompted the Chinese government to prioritize development of homegrown industry.In an effort to bridge the current trade imbalance and reassure consumers of the quality and safety of indigenous produce, the government has enacted and is currently developing legislations aimed at consolidating the dispersed market share occupied by Chinese enterprise (a large proportion of which is occupied by SME’s) into the hands of larger corporations which stand a better chance of competing against foreign multinationals. News that one of the most influential stakeholders in China's formula industry , Dumex (part of Danone Group) is implicated in widespread bribery and malfeasance may very well strengthen the government’s resolve to bridge the trade divide and also damage consumer confidence in Dumex’s brand.
In financial terms, initial speculation on the extent of this bribery estimate that Dumex spent as much as 30 million RMB a month to achieve its ends. CCTV reported on a hospital in Tianjin where doctors and nurses were bribed by Dumex to aggressively promote preferential use of Dumex formula as opposed to natural breast feeding. Beyond the obvious ethical ramifications, this is in direct violation of regulatory standards for formula manufactures which under no circumstances are allowed to market themselves directly or by inference as being more beneficial than natural breast feeding or utilise medical staff as marketing agents.
According to a CCTV reporter, Dumex paid the hospital in Tianjin a large monetary sum under the pretext of a “maintenance fee” but ultimately the money was used to pay doctors and nurses to push parents to feed their newborns Dumex formula, causing infants to become “accustomed” and develop “dependence” to the brand. These activities amount to little more than commercial bribery according to director of the Beijing Law Firm “Yi Sheng Hua” who outlined that should the accusations be proven, severe criminal punishments would follow for those found guilty. However with perfunctory bureaucratic savvy Dumex has issued a statement outlining that all accusations were contrary to company policy, that an investigation was underway and that all violators would be punished.
However this news may only scratch the surface of the deep seated corruption in this industry. It is also alleged that many companies in this industry are circumventing regulations by implementation of educational campaigns (read propaganda campaigns) targeting pregnant women. Regulatory loopholes are being exploited by company reps that offer free "strings attached" prenatal education programs, during which branded infant formula is pushed at the expense of sound advice on breast feeding. There are also reports on more complex schemes involving wholesale bulk purchase incentive schemes targeting hospital purchasing departments whereby a large discount is given for bulk purchases which allow hospitals to resell the product at an inflated price. Other schemes directly target women by offering monetary incentives for referrals, or alternatively target academic institutions to hold seminars and lectures which paint formula feeding in a favorable light.
Whilst the Chinese Government aims to promote Chinese enterprise it will need to clean up the industry and close regulatory gaps if it stands a chance at achieving its goals and leveling the playing field for Chinese enterprise. This latest fiasco in the ongoing corruption saga has somewhat played into the Chinese Governments hands and is particulary timely with reference to the aftermath of Fonterra's recent contaminated product recall. The Chinese Government may well use the current media momentum as a springboard to further its cause.However with the fallout from melamine scandals still fresh in the hearts and minds of Chinese consumers multinationals like Danone’s Baby Nutrition Division have seen growth of over 50% since 2007. The trade deficit ratio is currently approximately 4:1 with China importing more than four times the formula it exports. Scandals have paved the way for multinationals to dominate the market and with population growth continuing the future looks extremely bright for foreign enterprise. This may have put a chip in the veneer of Dumex's reputation but cannot be expected to cause a major change in consumer purchasing behaviors and we can expect the demand for foreign imports to only increase.
* To facilitate understanding of the steps needed to enter this multibillion dollar market, Chemlinked will shortly release a logical and comprehensive market access report compiled by our Baby Formula regulatory expert Echo Cao. The report will elaborate on the intricacies of regulatory compliance, the latest developments in BABY FORMULA legislation in China and offer expert advice, inferences and perspective on future regulatory direction.
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