GSK China probe a bitter pill for foreign firms

Beijing's targeting of British pharmaceutical giant GlaxoSmithKline in a high-profile bribery probe is a reminder of the risks foreign companies face when seeking the huge rewards of China's market, analysts say. Authorities have detained four Chinese GSK executives on allegations that employees used nearly $500 million in bribes to boost sales. But in a healthcare sector widely considered to be riddled with graft, some question why GSK is so far the main target. "I suspect they are no worse than anyone else," said Ben Cavender of consultancy China Market Research Group. "They are probably being targeted a little bit. I think having a whistle-blower made it difficult to be ignored," he said, referring to the allegations of bribery -- previously denied by GSK -- that emerged earlier this year after a source spoke to the Wall Street Journal. Police say GSK staff offered government officials and doctors bribes, and took kick-backs from travel agencies to organise conferences, some of which were fake. "The Chinese government firmly opposes business corruption in any form. Any company, be it domestic or foreign, will be punished by the law," China's commerce ministry spokesman Shen Danyang said. But analysts are sceptical that GSK is the only dirty player, given the country's opaque tendering system for drugs and doctors' low salaries. The New York Times has reported other foreign pharmaceutical companies used the travel agency at the heart of the bribery investigation into GSK. Chinese authorities have also questioned three Shanghai-based employees of Britain's AstraZeneca, detaining two, and have visited the offices of Belgium's UCB, according to the companies, although they did not specify what was being investigated. There are also government inquiries into foreign firms' pricing for goods from drugs to baby formula, and the moves are all being perceived as ways to exert pressure on companies to control retail prices -- and a pointed reminder of the pitfalls of doing business in China. Foreign investors have poured more than $1.3 trillion into China since it began a programme of economic reforms in 1978. The country was the most popular destination for foreign direct investment in 2012, the OECD estimates. Yet foreign companies still complain of an uneven playing field which favours domestic firms. "China... has gradually returned to a practice of favouring state-owned enterprises and national champions," the American Chamber of Commerce in China said in its annual policy white paper for 2013. The GSK case has echoes of another foreign company that fell foul of Chinese law, Anglo-Australian mining giant Rio Tinto, which saw four employees jailed in 2010 for taking bribes from Chinese steel firms. The National Development and Reform Commission (NDRC), China's top economic planner, earlier this month launched an investigation into foreign baby formula makers, quickly prompting companies such as France's Danone and Swiss food giant Nestle to slash prices. China is the world's biggest market for the product following a 2008 scandal involving tainted milk which killed six children, creating huge demand for foreign formula, which is considered safer despite its expense. Similarly, medicines made overseas are perceived as better quality and more effective after a string of controversies -- Beijing executed the former head of its food and drug administration, Zheng Xiaoyu, in 2007 for taking bribes in return for approving new drugs. As a result foreign medicines also command a premium in the market, which was worth $78 billion last year. In addition to the GSK bribery probe, Beijing is investigating 60 domestic and foreign pharmaceutical firms -- including big names such as Sandoz and Merck -- to determine how they reach their prices. The NDRC has sought to cut drug costs by administrative order since 1998, in line with government efforts to provide affordable health care. A top GSK executive visiting China in the wake of the bribery scandal pledged the company would lower retail prices to ensure its medicines were cheaper for Chinese patients. Zhao Zhen, of consultancy Sublime China Information Co., said a number of foreign pharmaceutical companies were being investigated. "There is an indication of issuing a challenge to all foreign drug companies," he said. Even so, analysts said government campaigns to lower prices, of medicines and other products, were not expected to slow foreign investment. With the huge scale of the opportunities China offers, foreign firms have little choice but to fall in line. "I don't think it's going to stop investment. China is too important as a market -- there's too much growth," said Cavender of China Market Research.