A customer’s complaint about a sub-par cake sparked a large-scale investigation that uncovered thousands of “ghost” food suppliers in China, resulting in astronomical fines for some of the country’s biggest companies and highlighting the pitfalls of fierce price competition.
The investigation — marred by fights between investigators and delivery service workers, a fake medical emergency and hastily scribbled “keep quiet” notes — began last summer when a man in Beijing, identified as Liu, received a birthday cake decorated with an inedible flower, according to multiple state media reports.
Liu ordered the cake through an online delivery platform and, dissatisfied with his purchase, reported the supplier to local authorities.
What regulators discovered was a fake bakery chain boasting almost 400 stores, operating with fake business licenses and no physical stores.
The incident triggered a large-scale nationwide investigation and revealed a parallel food supply chain in which a merchant charged a customer for the order, then posted the order on an intermediary platform for other producers to submit bids, with the lowest bidder chosen to fulfill the order, sacrificing both food quality and safety.
In total, more than 67,000 such “ghost” vendors, who had sold more than 3.6 million cakes, were discovered, state news agency Xinhua reported.
China’s market regulator, the State Administration for Market Regulation, concluded in its investigation last week that seven major delivery platforms, including Temu owner PDD, Alibaba, ByteDance’s Douyin, Meituan and JD.com, failed to adequately protect customers and properly verify food suppliers’ licenses.
The agency imposed a record fine of 3.6 billion yuan ($528 million) in total – the largest penalty since the country’s food safety law was amended in 2015, according to Xinhua.
The 10-month investigation highlights Beijing’s efforts to curb intense price competition that has driven companies into an unsustainable and self-destructive cycle; in this case, lower prices on delivery platforms at the expense of food security.
Known as involution or neijuan in China, intense price wars have spread across sectors in recent years, from electric vehicles to solar panels. The trend has worsened China’s deflation problem and weighed on the economy as prices fall and consumption weakens.
In response, Beijing launched an anti-devolution campaign last year, promising to curb such harmful practices across the economy. Last month, the state-run Economic Daily published an article calling for an end to price wars in the food delivery sector.
“Food and beverage companies have been forced to sacrifice quality and reduce margins, pushing the entire industry into a vicious cycle of losing money just to generate volume,” the newspaper wrote.
Flora Chang, an analyst at ratings agency S&P Global Ratings, told CNN that the government’s proactive intervention has had some initial effect in reducing unfair competition, but that platforms could find alternative ways to compete, including granting subsidies in other forms.
“That said, the fines are paving the way for platforms to compete more on quality… Overall, this suggests that the worst of unfair competition may be behind us for now, although the road to profitability recovery is still long,” Chang said.
In one example reported by Xinhua, a consumer paid 252 yuan ($35) for a 15-centimeter cake, but the order was discreetly resold through an intermediary platform, where suppliers bid 100, 90 and 80 yuan to fulfill it, with the lowest bid winning. The result was that the “ghost” merchant pocketed almost half the price paid by the consumer, while the delivery platform was left with a 20% service fee –– leaving the real baker with 30% and a reduced profit margin.
“This is by no means a minor violation, but a new form of illegal activity — which has become industrialized and large-scale,” Han Bing, an official with the State Administration of Market Regulation, told Xinhua.
Acts of resistance
While mapping the illegal supply chain, regulators came across uncooperative employees at delivery platforms, according to state-run newspaper China Quality Daily.
At one point, while regulators were questioning an employee at one of the country’s biggest food delivery services, a nearby colleague discreetly wrote “keep quiet” on a sheet of A4 paper and passed it around. When the employees noticed, the person crumpled the sheet and, in front of everyone, swallowed it.
In another case that occurred in the same unidentified company, in December, the head of security led a group that invaded the investigation site, pushing and violently attacking law enforcement agents, according to the media outlet.
Two days later, an executive suddenly fainted during interrogation and was taken away by ambulance, but doctors found no serious medical problems, according to the report.
Investigators described these episodes as part of a pattern of obstruction. Even when other companies did not resort to direct confrontation, they delayed, resisted handing over data, or provided incomplete information to authorities.
The market regulator handed PDD the heaviest penalty among the seven fined companies, worth 1.5 billion yuan ($221 million), citing the e-commerce giant’s repeated refusal to provide relevant information, submission of false documents and, in some cases, violent resistance to regulatory enforcement.
In an online statement released last week in response, PDD said it would comply with the penalties, while pledging to view this as a lesson to improve its operations. CNN has reached out to PDD for comment on the details of its resistance to the investigation.
Alibaba, Douyin, Meituan and JD released similar statements, saying they sincerely accept the penalties and would strengthen their compliance and governance measures to eradicate malpractices.
