Price factor

Bala Ramasamy, professor of economics at the Shanghai-based China Europe International Business School, says that measuring foreign and domestic firms with the same yardstick may be out of the question. "The NDRC is a state agency, so investigations against state-owned enterprises may not be done in the public domain, considering that China's social and economic context is different from that of the West.

"The public is not too aware of such investigations as they are often done within the government framework," says Ramasamy, whose teaching focus at CEIBS is international business strategy. He says there is sound logic on why most of the companies being investigated are multinationals.

Ramasamy says that in the 1980s and even 1990s, the foreign investment that came to China was for exports. "In the past, the Chinese government was not too concerned about price-fixing, because the majority of the companies came to China to use the resources, such as labor. The large proportion of what they produced in China was for exports.

"Over the past several years, with the growing market in China, more and more multinationals are beginning to look at the Chinese market. That's why we are going to see more cases involving multinational companies."

The investigations are being conducted to protect the Chinese market and to make sure Chinese consumers pay the right price for the right-quality products, Ramasamy says.

"Do I see more kinds of investigation happening? Definitely, as more investors are coming to China to tap the Chinese market."

Echoing similar views are James Roy, a senior market analyst with the Shanghai-based Market Research Group. Roy says the Chinese government is under great pressure to provide people the access to affordable prices, and the price differences between the same product being sold in China and other countries have often led to huge desire among Chinese to buy products from abroad.

Citing an example, he says a basic iPad 2 costs $488 in China, whose average per capita income is about $7,500. The same product costs $399 in the US, whose average per capita personal income is more than $42,000.

Clothing and other apparel are on average 70 percent more expensive for consumers in China than in the US, according to data provided by SmithStreet, a Shanghai-based strategy consulting and corporate advisory firm, which compared the prices of 500 items across 50 brands in both countries.

The huge demand to buy genuine high-quality infant formula at relatively low prices has also created an industry named daigou, an Internet-based business in which overseas Chinese act as shopping agents for those who are based in China.

Wang Huainan, CEO of Babytree.com, one of China's largest mother-and-baby online communities, says that whether or not the foreign baby formula companies violate the law or not, the retail price of foreign infant formula sold in China can often be twice that of the same product in other countries.

"Some of the foreign-branded milk is produced locally in China with ingredients imported from home countries, while some others export their final products directly to China. But the tariff China charges on imported dairy products is only about 4 percent of the price, so high tax is obviously not the reason for huge price differences," Wang says.

He also says China's domestic baby milk producers raised their prices by about 6 to 7 percent every year, whereas their foreign counterparts raised prices by 10 to 20 percent every year.

However, Roy of the China Market Group says pricing is an important part of a company's branding strategy, so every company should have the right to set their price differently in different countries.

"Our research finds that in many cases people have a lot of uncertainties about what they are buying. Price is often an ideal indicator to show what is good and what is not good. Producers don't charge very high prices, but only what the market can bear."