No Place to Hide: Transparency Is Shaping Consumer Awareness of Global Price Disparities

Buy low sell high. Taking advantage of asymmetric access to information has been a business staple since the Sumerians started trading with the Egyptians.

But with the advent of the internet and global awareness, it is getting more difficult for institutions to keep data about prices, information about trends and other commercially significant bits of knowledge confined to those who the enterprise thinks should need to know.

The impact has both financial and political implications. As the following article explains, Chinese consumers are discovering to their annoyance that prices of everything from a Starbucks latte to a Mercedes hood ornament cost more in China than in other parts of the world - and they are starting to complain to their government about it. In many western countries where the regulatory authorities have been beaten down, the issue would go no further. But the Chinese government is using the information to gain advantage for their citizens - and for the nation's trade position.

Suddenly, global corporations that should be reaping the reward of decades of low margin investment now that Chinese consumers are accumulating more wealth are finding that they have to shrink their margins - and that they face huge fines as well as ongoing legal scrutiny in the bargain.

The reality is that transparency is creating a global market. There may be regional disparities depending on supply and demand, but the chance that they will be driven by ignorance is decreasing rapidly. JL

Andrew Browne reports in the Wall Street Journal:

It's a rude surprise for multinationals. Just as the China market opens up, their profit margins are headed down.

For Western consumer brands in China, this is the moment they've been longing for.

The ranks of the middle classes are swelling; foreign wares once considered luxuries are now affordable. Yet, just as the sweet spot seems near for makers of higher-end goods, many of the world's biggest consumer names find themselves under unprecedented attack.

German car companies and Japanese auto-parts makers have been the latest targets in a wave of antitrust investigations that have resulted in fines and steep price cuts. Earlier probes have homed in on makers of dairy products, eyeglasses, pharmaceuticals and software. The campaign has embroiled everybody from Microsoft  MSFT in Your Value Your Change Short position to Mercedes-Benz.

What's going on? A combination, it seems, of some questionable practices by multinationals, bullying by overenthusiastic regulators and a tense political atmosphere tinged with antiforeign sentiment.

It's certainly true, as the Chinese media regularly point out, that the cost of everything from a Starbucks  SBUX in Your Value Your Change Short position latte to a Jaguar sedan is higher in China than in many other places in the world.

Now that so many Chinese are traveling abroad—they took more than 100 million trips last year—consumers are better able to compare prices. And they're starting to complain vociferously.

Some of the price difference is explainable by factors such as transport and real-estate costs, higher Chinese import taxes and fragmented supply chains in which multiple dealers each add a markup. But at least some multinationals have adopted sales practices in China that might be ill tolerated by customers—or regulators—in Europe or the U.S.

Auto makers, for instance, don't always give their Chinese customers a choice in their purchase of spare parts. High prices are the result. In response to an antitrust investigation, Mercedes maker Daimler AG and Chrysler have both slashed prices of their sparts in recents weeks.

Microsoft, which has been the subject of surprise inspections related to how it distributes its products in China, has said it will cooperate with any inquiries.

The fact that regulators are going after allegedly dubious practices by multinationals isn't what bothers trade officials at Western embassies in Beijing, even if they suspect that the probes sometimes have the effect of strengthening Chinese state-owned competitors.

What concerns them the most is the heavy-handed way that investigations are being pursued—and highly charged media coverage that makes for a troubling atmosphere for Western companies.

Foreign executives have learned two early lessons from the antitrust probes. First, the law provides little refuge. The message that the National Development and Reform Commission, the government agency that sets pricing rules, delivers in private to multinationals at the outset of a price-fixing investigation is not to bring in their foreign lawyers, according to numerous accounts by foreign executives, diplomats and lawyers themselves.

The second lesson is connected to the first: Resistance is futile. There's scant need for lawyers when companies face a choice of either bowing to demands for quick remedies or becoming involved in a protracted wrangle with regulators in what is still a state-dominated economy. In almost every antitrust case launched so far, foreign companies have capitulated without a fight.

Voluntary price cuts of up to 20% are the norm, accompanied by board-level expressions of remorse and promises to do better.

And these cuts are offered at the very outset of investigations—and, sometimes, to get ahead of them. Chrysler described its abrupt decision to slash car-part prices as a "proactive response" to the price-fixing probe as it got under way. These price-fixing investigations have been accompanied by heated nationalistic rhetoric in the state media with antiforeign overtones. Taking down multinationals a peg plays well among the large sections of the public that view them as arrogant.

The China Youth Daily castigated multinationals in a commentary, saying they "pollute the environment, lie to consumers, act arrogantly when facing their wrongdoings, and ignore China's law and protests from Chinese consumers."

Last year, when New Zealand dairy giant Fonterra announced a possible botulism problem and recalled several products, Xinhua News Agency took aim not just at the company but the entire country of New Zealand. The "100% Pure New Zealand" tourism slogan had become a "festering sore," Xinhua declared. It turned out to be a false alarm: Tests showed Fonterra products to be safe.

This aggressive media coverage is in turn playing out against a backdrop of deepening political turmoil in China. President Xi Jinping's efforts to turn around the economy so it relies more on services and consumption, rather than investment, pits him against entrenched interests in state enterprises. Meanwhile, his all-out war on corruption is taking down some of the most powerful officials in the country and triggering anxiety across the bureaucracy.

That combination—populism along with high-level political uncertainty—is unnerving many foreign investors. They fear they're being caught in the middle of powerful forces outside their control.

Chinese regulators reject criticism that they unfairly target foreign players. "Before the Antimonopoly Law, all enterprises are equal," the China Daily quoted Shen Danyang, the spokesman of the Ministry of Commerce, as saying. "There is no such thing as xenophobia." Still, it's a rude surprise for multinationals. Just as the China market opens up, their profit margins are headed down.