For years in Madera County in the valley north of Fresno, John Peters turned vitamins and minerals into formulas that farmers blended into feed grain and fed to their chickens, hogs and cattle. Such nutritional additives mean quicker-growing animals and more profits for farmers. While it used to take chickens nine weeks to reach broiler size, now they gorge themselves on vitamin-enriched feed and in just six weeks are ready to leap onto global dinner plates.
But Peters said that his vitamin premix business is now in trouble. The chicken side is being gobbled up by vitamin makers Hoffmann-La Roche of Switzerland and BASF of Germany, and he expects that the rest of his premix business will soon follow. Last summer, Peters said, Roche refused to sell him a key feed ingredient because he would not buy all his vitamins from it, and then proceeded to underbid him with longtime customers. In Texas, Missouri and Minnesota, other small-animal nutritional businesses are facing a similar death squeeze at the hands of Roche and BASF, industry sources said.
Yes, these are the same two global giants that masterminded the most rapacious price-fixing cartel in modern business history during the 1990s and got nailed with the largest criminal fines ever levied. Roche paid $954 million and BASF more than $500 million after entering guilty pleas with the US Department of Justice, Canada, Australia and the European Union.
When the cartel was exposed in 1999, Roche, BASF and Rhône-Poulenc (now Aventis) -- which escaped charges because it was the first cartel member to cooperate with the DOJ -- controlled about 75 percent of the $6-billion-a-year global vitamin business. They had used their industry dominance to pressure at least twelve smaller vitamin makers in Europe and Asia into an arrangement that top executives had taken to calling "Vitamins Inc." But now, three years after the cartel was exposed, instead of having been reined in, Roche, BASF and Aventis/CVC (in November Aventis sold its vitamin business to CVC Capital Partners of London for an undisclosed sum) are close to grabbing a near-monopoly in the global production and distribution of vitamins, having increased their dominance to at least 85 percent of the global market.
There is no current evidence that the vitamin makers -- who also supply vitamin additives for food products made by companies such as Kraft, Coca-Cola, Kellogg and Nestlé, as well as alphabet vitamins purchased directly by consumers -- have resumed meeting in secret to fix prices. But a Nation investigation shows how their recent moves illustrate the decline of traditional competition in global sectors dominated by just a few companies, and how those companies can use their market power to exploit customers. Moreover, it reveals the increasingly limited power of governments to protect national economies, consumers and farmers.
Vitamin industry sources across North America and in China said that Roche and BASF appear to operate in unison, using identical strategies to squeeze smaller industry players out of the vitamin business. There doesn't appear to be any sign of real competition between them. In analyzing the recent moves, Gene Reed, an Arkansas animal-feed broker who was a key government witness against the vitamin cartel, said: "It may take them five years to get prices back up to where they were before the cartel was exposed, but they are going to win this one, and there's nothing that the DOJ can do to stop it." The latest schemes began as vitamin prices tanked by almost 50 percent following the guilty pleas in 1999. Roche and BASF decided they needed to substantially lower production costs to protect their market shares, so they embarked on an expensive program to build larger plants equipped with the latest production technology and to close older plants. Over time, they believed, this would allow them to defeat their Chinese competitors as well as other, smaller European and Asian competitors and to raise prices again; it would also make it unlikely that new investors would be tempted into the vitamin world.
Horst Kramer, a spokesman for Roche in Basel, confirmed that it is Roche's goal to reduce production costs by 50 percent over the coming decade while increasing its profits. Roche is spending more than $500 million to build new plants and upgrade existing plants, concentrating the production of each vitamin in a single plant. BASF has articulated a similar plan and will spend close to $600 million to upgrade its production technology. "We want to achieve profitable growth and further extend our market position," said BASF spokesman Dr. Hartmut Unger. By far the biggest expansion BASF has made has been the July 2000 takeover of Takeda Chemical Industries of Japan-a marriage of the second- and fourth-largest firms in the industry-which was rubber-stamped by all North American and European governments. When the current plant expansion is completed, Roche and BASF will have centralized much of their production in Europe, and in Asia to a lesser extent. Today they are the only producers of all thirteen vitamins, as most others make only one or two vitamins.
Meanwhile, for more than a decade Roche and BASF have deployed a vertical integration strategy to increase control over the distribution of animal vitamins. They began building their own vitamin premix plants to supply custom-tailored blends for use in animal, poultry, fish and household pet feeds. Roche now has four large animal-vitamin premix plants from Georgia to California as well as two in Canada and one in Mexico. BASF has a similar North American premix distribution system. When it embarked on its vertical integration strategy, there were more than fifty makers of custom-made mixtures of vitamins in the United States who would buy bulk vitamins from Roche, BASF and others, and then blend them with minerals and other additives and sell them to feed makers. In just over a decade Roche and BASF have driven most independents out of business and now control about 90 percent of the vitamin premix business in North America, industry sources said. An executive at one surviving independent premixer said a BASF sales manager told him, "I'm going to put you out of business. Your accounts are mine."
The Department of Justice, in negotiating guilty pleas with the cartel players in early 1999, levied hefty fines but left the vertically integrated industry structure intact. The same decision was adopted in Canada, Europe and Australia. "We urged the DOJ to split off vitamin production from the wholesale premix business to protect farmers," but it just didn't have the political appetite for it, said Steve Blum, a key whistleblower who previously worked for Lonza of Switzerland. Said a former BASF executive, "The Justice Department got its five minutes of TV time touting the record price-fixing fines, but now it has let the two big guys run everybody out of the animal premix business. They make the vitamins and then they sell them; there is no way anybody else can come into the animal feed market, so they'll make back in a few years' time all they lost in fines and settlements."
"Denied access marketing" is another weapon being used by Roche and BASF to drive the few remaining vitamin premixers out of business, sources said. Independents said that if they bought bulk vitamins from Chinese vitamin makers they sometimes had difficulty getting delivery of other vitamins from Roche and BASF. Four sources cited the recent example of biotin (vitamin H) -- which helps broiler chickens and hogs absorb key nutrients from feed and consequently speeds up growth. An ongoing supposed shortage of biotin resulted in a price jump from $950 per kilogram in 2000 to over $6,500 per kilogram recently, said a source with strong connections to Chinese companies. Roche, which is now believed to control more than 70 percent of the biotin market, then used the shortages as a reason to deny biotin to independent premixers who buy some of their vitamins from Chinese companies.
Two California animal premix blenders said they were told point blank during the biotin supply squeeze that unless they agreed to buy all their vitamins from Roche, they would get no biotin. They also said that Roche listed its biotin at $7 per gram but agreed to give it to them for $2.50 per gram if they bought the rest of their vitamins from them. "Roche has used biotin to leverage all broiler premix business in California away from us," said Peters, the California premix blender.
Roche spokesman Kramer denied that the company engaged in any such efforts.
Reduced prices have also been used in other ways to advance the companies' goals. Roche and BASF have on occasion charged artificially low prices in order to make it difficult for the Chinese or anyone else to take business away from their established customers in North America and Europe, industry sources said. For example, the synthetic version of vitamin E, which cost about $17 per kilogram during the cartel days -- when prices were inflated -- today costs around $6.30 in the United States and Europe. It costs the Chinese about $5.35 per kilogram to make synthetic vitamin E, plus shipping, making it almost impossible for them to make a profit.
A similar situation obtains with regard to vitamin A, industry sources said. "When I go to market material I can get from China, Roche drops the price below Chinese costs and keeps it there until the Chinese drop out," said one industry source.
The two companies use predatory pricing with impunity because they know the DOJ will not prosecute them for it; US judges have refused, in decisions over the past decade, to see predatory pricing as an anticompetitive tactic.
Kramer said Roche is keen to improve its profit margins and so is unlikely to engage in tactics that will further depress prices. BASF would not discuss current claims of market manipulation on its part because of an ongoing civil damages claim filed in Washington by large vitamin users.
One of the biggest new areas for vitamin makers is in the production of healthier "functional foods" for the blimped-up planet. Giants such as Philip Morris, Nestlé, Coca-Cola, Heinz, Pillsbury and PepsiCo realize there is now good money to be made from the very people they've helped fatten up with foods emptied of nutrients during processing. In this world Roche and BASF have a lock on blending vitamin premixes for large food processors, said a consultant for Chinese vitamin makers. They offer attractive rebate programs to the processors so that the more vitamins they buy, the lower the price. In addition, the Chinese are finding large North American and European food and supplement companies reluctant to deal with them for fear of being denied key vitamins obtainable only from the two giants.
The lack of government interest in the increased dominance of Roche and BASF does not bode well for consumers and farmers. Most vitamin prices have now stabilized and several are already rising -- earlier this year prices for B2 and C rose more than 5 percent, Roche spokesman Kramer said. He said anticipated increased sales from new production facilities will have to come at the expense of other vitamin makers. An early victim was Japanese vitamin E producer Eisai USA, which abruptly shut its three-year-old, $35 million Bayport, Texas, plant at the end of August 2001. Industry sources said artificially low vitamin E prices made the plant uneconomic. There are also concerns emerging that some Chinese vitamin makers may be tiring of their uphill struggle for market share with the three giants, a problem exacerbated by the withdrawal of Chinese government financial support as it prepared to join the World Trade Organization. Some Chinese companies are known to be chatting with the giants over the possibility of becoming contract suppliers with guaranteed annual volumes in exchange for abandoning aggressive export sales in North America and Europe.
Meanwhile, the fallout from the vitamin cartel prosecutions continues. Many large cartel victims are still in court in Washington, seeking more than $1 billion in damages from cartel members, who could walk away with close to $5 billion in profits from the global price-fixing scam after paying all fines and damages. But as often happens in global business, plaintiffs are stuck buying their vitamins from the defendants because there are no alternate suppliers. "The vitamins case appears to be one in which crime did pay," said Purdue University professor John Connor in his new book Global Price Fixing.
So where will this all lead? The DOJ has convened more than thirty grand juries across America to probe other global business sectors -- primarily in food, agriculture and pharmaceuticals -- for price-fixing offenses. Attempts over the past decade to address the widespread global corporate cartel culture by creating an international antitrust enforcement agency as an offshoot of the World Trade Organization have been defeated by pressure from the corporate sector in North America and Europe. It will likely take the exposure of several more damaging global cartels before the political climate will change and tough new regulations-like those now possible in the accounting world-will be implemented to protect national economies, farmers and consumers.
Jock Ferguson has been an investigative journalist for thirty years. Research support was provided by the Investigative Fund of the Nation Institute.