By John Liu, CNN
Hong Kong (CNN) — A customer’s complaint about a disappointing cake kicked off a massive investigation that uncovered thousands of “ghost” food vendors in China, resulting in staggering fines for some the country’s largest firms and highlighting the pitfalls of the cutthroat price competition.
The inquiry –– marked by scuffles between investigators and delivery service employees, a feigned medical emergency and hastily scribbled notes to “stay silent” –– 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 accounts.
Liu ordered the cake through an online delivery platform and, unsatisfied with his purchase, reported the vendor to local authorities.
What regulators found was a bogus cakery chain, boasting nearly 400 locations, operating with forged food business licenses and no physical storefronts to be found.
The incident triggered a full-scale nationwide probe and uncovered a shadow food supply chain, in which a merchant would charge a customer for their order then turn around and post the order on an intermediary platform for other producers to bid on, with the lowest bidder chosen to fulfill order, sacrificing both food quality and safety.
In total, more than 67,000 such “ghost” vendors, which had sold over 3.6 million cakes, were discovered, state news agency Xinhua reported.
China’s market regulator, the State Administration for Market Regulation, concluded in its inquiry last week that seven major delivery platforms, including Temu’s owner PDD, Alibaba, ByteDance’s Douyin, Meituan and JD.com, failed to adequately protect customers and properly verify food vendors’ licenses.
It imposed a record fine of 3.6 billion yuan ($528 million) altogether – the largest penalty since the amendment of the country’s food security law in 2015, according to Xinhua.
The 10-month investigation underscores Beijing’s efforts to crack down on intense price competition that has driven companies, into an untenable self-defeating cycle, in this case, lower prices on delivery platforms at the expense of food safety.
Known as involution or neijuan in China, the intense price wars have spread across industries in recent years, from electric vehicles to solar panels. The trend has exacerbated China’s deflation problem and weighed on the economy as prices decline and consumption weakens.
In response, Beijing kicked off an anti-involution campaign last year, vowing to curb such unhealthy practices across its economy. Last month, state-run newspaper Economic Daily published a commentary calling for an end to the food delivery price wars.
“Food and beverage businesses have been forced to sacrifice quality and compress margins, pushing the entire industry into a vicious cycle of losing money just to generate volume,” it wrote.
Flora Chang, an analyst at financial services firm S&P Global Ratings told CNN the government’s proactive intervention has had some initial effect in curbing unhealthy competition, but platforms could find alternative ways to compete, including deploying subsidies in other forms.
“That said, the fines are paving the way for platforms to compete more on quality … Overall, this suggests the worst of the unhealthy competition may be behind us for now, although the road to a recovery in profitability remains a distant one,” Chang said.
In one example disclosed by Xinhua, a con