Under new scrutiny, foreign firms 'have to be careful' in China, experts say

Over the past few years, Chinese regulators have stepped up their game. In the wake of some well-publicized drug-safety scandals, the government promised a crackdown--and it delivered. The punishments were harsh, too. Seven public hospital directors were jailed last year for accepting kickbacks. One allegedly corrupt drug regulator was executed, as were two food-company managers involved in a poisoned milk scandal.

But China appeared to be most interested in flushing out problems in domestic companies. That's changed. Just this week, China has unveiled investigations of four foreign multinationals: GlaxoSmithKline ($GSK), with several managers detained in an "economic crimes" probe; and Nestlé, Abbott Laboratories ($ABT) and Danone, under investigation for "monopolistic" pricing. Market analysts believe regulators have targeted foreign companies for increased scrutiny.

It's just the latest example of the hazards of emerging markets. As growth in the U.S. and Europe has slowed--even reversed itself--drugmakers have been targeting the world's fastest-growing countries, with China at the top of the list. Bayer, Sanofi ($SNY), Novartis ($NVS), Eli Lilly ($LLY), Novo Nordisk ($NVO) and more have sunk time and money into expanding their sales and distribution networks, building local manufacturing capacity and amping up Chinese R&D. The country's healthcare reform, with its promise of billions in additional annual spending, made China a prize worth fighting for.

Since then, China's luster has dulled a bit. It's still the fastest-growing pharma market, and some drug companies are hiring more workers there than anywhere else on the globe. But the government has clamped down on drug spending, placing some foreign drugmakers' products under price controls for the first time. The government has now cut drug prices four times since 2011, including 15% reductions earlier this year. Manufacturing costs have increased, thanks to reductions in government investment and tax rebates, plus inflation.

And now this. Experts say that regulators are looking to bag foreign companies to gain attention for their anti-corruption and product-safety efforts. "Everybody is being targeted, but I think it's more of a prize, or it's something you can emphasize a lot more in media, when you find foreign companies are doing it as well," China Market Research Group analyst James Roy told Bloomberg.

The message, according to Roy? "Foreign companies operating in China have to be careful."

- see the Bloomberg story