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Time to Start Minding Your P's (Prices) in China?

2014-08-08 17:17:30

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News this week that China is starting to crack down on what it sees as pricing anomalies by non-domestic firms operating in the country, perhaps surprisingly because they are actually charging higher prices within China than they are in their home markets for the same items.

The Wall Street Journal reported earlier this week that Chinese antitrust officials have launched probes of companies ranging from car makers Audi and Daimler to technology companies Microsoft and Qualcomm, but they haven't always disclosed what they are investigating.

And in breaking news, just yesterday Chinese officials raided Daimler's Shanghai offices, looking for evidence of overpricing by the company in China. Daimler says it is cooperating with Chinese authorities in the matter.

"Experts say China is responding to greater awareness that the prices its people and companies pay for goods from foreign companies are often higher than those in other markets," the Wall Street Journal notes.

For example, Chinese consumers pay about $470 for the least costly version of an iPad Mini with Retina display, while U.S. consumers can buy one for $399.

Replacement car parts are also often more expensive in China than they would be in other countries, but market experts says that that is in part because in China many car companies are able to insist insist the parts be sold only through authorized dealers, freezing out discount retailers, who might offer parts that are just 20% of the price through approved channels.

Others note that for some items, Import and luxury taxes in China also can drive prices up there.

The investigation is obviously very broad. Also just this week, there were reports that the Chinese authorities are stepping up scrutiny of the prices of medicines from western pharmaceutical groups, against a backdrop of growing evidence they are often charged substantially more than richer countries.

The scrutiny is being fueled in part because more and more Chinese are travelling, and often see prices for goods outside the country that are lower than they have been paying within China.

And it is not only Chinese consumers that are concerned. Chinese electronics manufacturers sometimes pay more for microprocessors inside China than do competitors in other countries, the Wall Street Journal notes.

Sources say the targets for Chinese regulators in many cases are foreign companies with a commanding presence in their markets and that lack direct or meaningful Chinese competitors.

Just this past May, the Chinese government fined US eyewear makers Bausch + Lomb and Johnson & Johnson for what it called excessive control over prices, related to enforcing strict adherence to manufacturer's suggested retail prices and forcing resellers to only run promotions all at the same time.

Those two companies plus a couple of others were only fined a relatively modest $3 million in total, however.

Chinese antitrust officials argue that Beijing isn't focusing just on foreign companies. In recent years, Chinese regulators have tackled cases involving alleged antitrust activity in the market for a Chinese liquor known as moutai as well as in cement. Not even the best-connected state-owned enterprises have escaped scrutiny, they say, citing several examples.

The Chinese also note that companies such as Microsoft and Qualcomm have faced antitrust type scrutiny in Europe and elsewhere in the past.

One big difference in China, experts note, are that companies sanctioned by government regulators do not have any real recourse to challenge the rulings in the court system, as they can in the US and Europe. Chinese courts are controlled by the Communist party there and highly unlikely to overturn any regulatory action by the government.

The Wall Street Journal says that the scrutiny of some foreign automakers in China is working in the country's favor. After an editorial by the official Xinhua News Agency last August said foreign car makers earned exorbitant profits by dominating the market and controlling auto-parts sales, several have moved to cut prices. Mercedes-Benz said late Sunday it would cut the costs of spare parts sold in China by an average of 15% - though that was too little, to late to stop yesterday's raid. Audi announced price cuts for spare parts of as much as 38% in the past few days.

And of course, in June China killed the proposed P3 Network, an alliance between the three largest ocean container carriers, led by Maersk Line, after US and Euro regulators had given the consortium the green light. While China cited the market concentration the alliance would bring as a threat to competition, some observers thought that decision was also a way for China flex its growing regulatory muscle.

Source: SCDigest