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 of 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 cak ery 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 consumer paid 252 yuan ($35) for a six-inch cake, but the order was quietly resold through an intermediary platform where vendors bid 100, 90 and 80 yuan to fulfill it, with the lowest bidder winning. The result was the “ghost” merchant pocketing nearly half of the price paid by the consumer, while the delivery platform took home a 20% service fee –– leaving the real baker with 30% and a thin profit margin.

“This is by no means a minor violation, but a new form of illegal activity — one that has become industrialized and scaled,” Han Bing, an official with the State Administration for Market Regulation, told Xinhua.

Acts of Resistance

While mapping out the illegal supply chain regulators were met with uncooperative employees from the delivery platforms, according to state-run China Quality Daily.

At one point, as regulators were questioning an employee of one of the country’s largest food delivery services, a colleague nearby quietly scribbled “stay silent” on a sheet of A4-sized printer paper and passed it along. When officials noticed, the person crumpled the page and, in front of everyone, swallowed it.

In another instance at the same unspecified firm in December, the head of security led a group to storm the investigation site, pushing and shoving law enforcement officers violently, the media outlet re ported.

That was followed days later by an executive abruptly collapsing during questioning and being taken away by ambulance, only for doctors to later find no serious medical issue, the media report said.

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 supplied incomplete information to authorities.

The market regulator handed PDD the heftiest penalty among the seven firms fined, 1.5 billion yuan ($221 million), citing the e-commerce giant’s repeated refusal to provide relevant information, the submission of false materials, and sometimes violent resistance to regulatory enforcement.

In an online statement last week in response, PDD said it would comply with the penalties, while pledging to take this as a lesson to improve its operations. CNN has reached out to PDD for comment on the details of its resistance to the probe.

Alibaba, Douyin, Meituan and JD have released similar statements, saying they sincerely accept the penalties and would strengthen their compliance and governance to root out the malpractices. (CNN)

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