Danone bows low to succeed in China Pressure from Beijing seems to be part of a broader campaign to cut prices for domestic consumers Lord Macartney, Britain's first envoy to Beijing, caused an uproar at the Chinese court in 1793 when he refused to kowtow at the feet of the Qianlong emperor. Some 220 years on, prudent European executives will do what is necessary to keep a foothold in China's immense market. Witness the haste with which Nestlé and Danone, the Swiss and French groups, cut their local prices for infant formula milk after Chinese authorities launched a probe into price-fixing and anti-competitive behaviour in the baby food sector. This undisguised pressure from Chinese officialdom seems to form part of a broader campaign to cut prices for domestic consumers. Over recent months, officials have targeted a wide range of foreign and domestic companies, from drug manufacturers and luxury carmakers to jewellers. As far as concerns over the baby milk business, Beijing has a point of sorts. From 2008 a stream of scandals about contaminated, Chinese-made children's products and food enabled western companies to jack up prices for formula milk and other items. Many fearful Chinese parents, restricted by the state's population control laws to only one child, paid up rather than risk harm to their babies. The insatiable demand for safety gradually became entangled with the schemes of profit-hunting middlemen. Early this year, retailers in Australia, Hong Kong and even the faraway UK restricted sales of powdered baby milk to a couple of tins per customer, because unofficial traders were buying in bulk for resale to the Chinese mainland. Hardly surprising, then, that China's authorities decided enough was enough. The warning of a price-fixing inquiry from China's economic planning agency induced Danone to announce price cuts of between 5 and 20 per cent for baby milk and Nestlé to make average cuts of 11 per cent. Danone merits attention because, for all the vision and talents of Franck Riboud, chairman and chief executive since 1996, the French group has never found China an easy market. Yet China accounts for 6 per cent of group sales and is a crucial element of Danone's global investment plans. It was therefore judicious of Danone to cut its infant formula milk prices in China less than two months after it had announced a deal that it hopes will seal its long-term presence there. Danone's first effort in China was a joint venture with Wahaha, a soft drinks maker controlled by Zong Qinghou, China's richest entrepreneur. The French group acquired 51 per cent of the new business for a $41m investment. But the deal soured in spectacular fashion in 2007 when Danone accused Wahaha of setting up shadow competitors that were cheating the joint venture out of $100m in sales. Danone's second attempt, a 2006 joint venture with Mengniu, a dairy producer, failed to secure official authorisation. Yet the French group did not give up. In May it launched two new joint ventures, again with Mengniu. This €325m investment appears more stable than the previous two deals. For one thing, Danone secured the Chinese government's support in advance. For another, Danone is not repeating its mistake with Wahaha and trying to be the main equity holder in a venture linked to a premium Chinese brand and its fabulously wealthy, iron-willed owner. The joint ventures with Mengniu are about yoghurt rather than baby milk, but Danone wisely recognises that, in a political as much as a commercial context, its business activities in China are inseparable. A successful but not overambitious yoghurt partnership with Mengniu, coupled with a sensitivity to government concerns about infant formula prices, should benefit both Danone operations over the long run. With western European markets in the doldrums, China powered a 14 per cent growth in Danone's baby nutrition sales in the second quarter that made this division the most profitable of the group's four units. Baby nutrition now accounts for 22 per cent of Danone sales, compared with 54 per cent for dairy products, 18 per cent for bottled waters and 6 per cent for medical nutrition. But if China is important to Danone, Danone can be important to China. After all, Mengniu was one of 22 Chinese dairy companies involved in the 2008 scandal in which milk tainted with melamine, a toxic chemical, killed six babies and made several hundred thousand ill. Danone is a European icon of food safety and quality. By going into business with Mengniu, Danone will serve the government's purpose of allaying public concerns about the Mengniu brand. All of which shows that, whether or not you call its baby milk price cuts a kowtow, Danone is learning what it takes to be successful in China.