China fines Unilever

Showing a willingness to control rising prices with aggressive tactics, Chinese authorities on Friday (6 May 2011) fined consumer-goods maker Unilever PLC for talking publicly about planned price hikes, which the government said contributed to a scramble for products like soap and detergent in the inflation-hit country.

The National Development and Reform Commission, China's economic planning agency, fined Unilever two million yuan ($308,000), saying the Anglo-Dutch company had broken the law when it spread information about impending price increases and disrupted market order.

China's government is battling mounting inflation problems that run the risk of destabilizing the country. Inflation hit a 32-month high in March. China's consumer-price index jumped to 5.4% from a year earlier, the fastest rise since July 2008, as soaring commodity costs have driven food and consumer-goods companies to raise prices.

The fine issued to Unilever comes as Chinese consumers have grown fearful of the increasing costs of their food and other daily necessities. To soothe their woes, China's leaders, who believe state power is a critical component to maintaining economic growth and stability, have stepped in. But the Chinese government has limited tools to curb inflation in part because of its exchange-rate regime.

The Chinese government's heavy hand, while intended to maintain social calm, poses risks for companies operating in China, such as Unilever. Surging commodity costs are not only affecting the pocket books of consumers, but also many businesses' profit margins.

Unilever appears to be the only company that has been fined. A noodle maker, Tingyi Holding Corp., was given a warning over discussing price increases publicly, but no fine was issued.

In a statement Friday, the London-based consumer products maker didn't comment on the NDRC's specific allegations.

"As a company with a long-term commitment to China, we continue to be sensitive to the local environment. Therefore, we accept the decision of NDRC and Shanghai Price Bureau," Unilever said. It added that it abides by laws and regulations in China and a global code of practice.

The NDRC has warned some companies about the dangers of inflation, pressuring firms that make products including cooking oil, food and soap to steer clear of rapid price rises. It's unclear how many companies have been contacted. Unilever and Tingyi were both among the firms that were asked to refrain from price increases, as was Singapore-based Wilmar International Ltd., a major cooking oil producer, and snack company Want Want China Holdings Ltd.

Another big consumer products company, Procter & Gamble Co., declined to comment Friday on whether it had been asked to do the same.

"We don't discuss or disclose pricing plans in China," a P&G spokesman said. He said Cincinnati-based P&G does not face fines in the matter.

The government's resistance to price increases leaves consumer-product companies in a tight spot.

"Companies have only one choice: acquiescence," said Burt Flickinger III, a former P&G executive who is now a managing director at Strategic Resource Group, a consultancy that advises the consumer-products industry on global operations. Mr. Flickinger said his firm has been warning clients for 20 months to try to raise prices very slowly.

Nailing down inflation has been a major priority for China's leaders, who have taken measures to combat the rising cost of consumer goods, including four interest-rate increases since October. Prices, however, have continued to climb.

The tool the Chinese government used to discipline Unilever on Friday was the country's Price Law, a regulation that limits public commentary about future prices to avoid anticompetitive practices, including price fixing. Though Unilever made public statements in March about impending price increases on its products due to rising commodity costs, the NDRC statement released Friday did not suggest Unilever colluded with other consumer-goods makers on prices.

"The inflation concern makes the government much more willing to exercise this tool," said Shang-Jin Wei, Professor of Chinese Business and Economy at Columbia University. "In the last few years, China had very low inflation rates, so this was not as urgent."

Mr. Wei, who called the fine leveled against Unilever "very uncommon," said the move probably reflected a combination of the need to enforce antitrust laws and the desire to combat worrisome inflation: "There is potentially a mixture of motives here."

For the Chinese government, controlling inflation is crucial.

"Politically, it is an extremely sensitive issue, because the support for the government and the legitimacy of the government comes largely from the fact that people's lives have been getting better," said Eric Thun, Lecturer in Chinese Business Studies at the University of Oxford.

"Those that are less well off are all of a sudden finding that the prices are rising dramatically. That creates a lot of anger and frustration, which is exactly what the government fears the most."

The Unilever incident dates back to late March, when reports first surfaced in local Chinese media saying that Unilever, Procter & Gamble and domestic consumer-goods companies were planning to boost prices up to 15% in April on account of rising commodity and transport costs.

The news articles quoted Shanghai supermarkets as saying they had been notified by Unilever and P&G of impending price increases.

Some reports also included a quote from a Unilever executive that made note of rising commodity costs but did not appear to cite specifics about price increases.

Unilever, which makes Omo detergent, Dove soap and Rexona deodorant, later confirmed to The Wall Street Journal that there would be price increases across its portfolio in China but declined to give details regarding the timing or which products would be affected. P&G said it hasn't announced price increases.

By late March, shoppers in some Chinese cities were clearing supermarket shelves of soap, laundry detergents and shampoo based on the media reports.

At a Tesco PLC grocery store in Shanghai, a service manager said customer numbers doubled the weekend after the reports surfaced, with shoppers stripping the shelves bare of laundry detergent.

After Tingyi Holding, the maker of Master Kong instant noodles, signaled price increases, there also were reports of scrambling for noodles.

The NDRC also investigated Tingyi and issued it a warning but no fine. Both Unilever and Tingyi have agreed to hold off on price hikes after meeting with the NDRC.

Separately, Unilever reached an agreement with the U.S Department of Justice Friday regarding its $3.7 billion deal for haircare firm Alberto Culver Co. Alberto Culver will divest the VO5 brand in the U.S., and Unilever will divest the Rave brand in the U.S.

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