Chillin'Competition

[Note by Nicolas and Alfonso: Chillin’Competition is going global. From now on, we will have guest bloggers of reference in major jurisdictions or regions other than the EU and the US. They will report regularly on what’s hot in their jurisdictions. Their posts will appear under 2 new categories: China Watch and Latin America Watch (new country/region sections will be created in the future). There’s so much interesting stuff going on out there that it would be a shame to miss it.  

A good friend, long-time reader of this blog and bright lawyer, Adrian Emch (Counsel at Hogan Lovell’s in Beijing) will be our correspondent for China (of course all the views expressed by Adrian here are strictly personal and not necessarily coincidental with those of his firm or clients). Now that you’ve been introduced, we leave you with him].

Welcome to the wondrous world of Chinese competition law! I am very honoured to join this blog and help it ‘go global’–to chill competition on a worldwide basis. As an avid reader of the blog from the beginning, I personally share many of Nicolas’ and Alfonso’s views, including the view that there is room for fresh ideas and even fun within the competition law world. So I am very glad to contribute to the debate on worldwide convergence (and divergence!), best (and worst) practices, etc. with blog posts aimed at enhancing cross-fertilization among Eurasian competition law cultures!

For this inaugural post, I have chosen at topic that falls within the heart of Nicolas’ and Alfonso’s obsessions expertise, namely exchanges of price-related data between competitors.  So it is not only an ideal topic to blend in, but also a very timely one. Today marks the 10^th anniversary of the one-off information exchange meeting between the five Dutch telecoms operators held by the European Court of Justice to have engaged in cartel-like (?) conduct in the infamous T-Mobile judgment. As insiders know, 13 June is considered the date of birth of information exchanges as a new and basically independent antitrust discipline…

More importantly, how to deal with information exchanges is a question that many antitrust regulators are still grappling with in many jurisdictions beyond the EU. With this background, on 6 May 2011, the National Development and Reform Commission (NDRC) –one of China’s three-plus competition authorities, with jurisdiction over price-fixing (among other things)– slapped a record antitrust-related fine (over €200,000) on Unilever. At first sight, the NDRC decision may seem to smack of old-fashioned industrial politics. But, at the same time, some might view it as cutting-edge antitrust enforcement. 

The facts are a bit murky, but here is what I think happened: according to NDRC, in March 2011, a Unilever China spokesman gave several interviews, released statements to the domestic press and sent letters to supermarkets throughout China announcing price rises for some daily-use products such as shampoo, face-wash and laundry detergent, to take effect from 1 April. These announcements triggered a series of reactions: first, a few of Unilever’s competitors such as Liby and the Nice group reportedly announced price rises to take effect from 1 and 6 April. Second, consumers made “hamster purchases.” NDRC found that the announcements led to panic buying: it reported that the sales of the above-mentioned products multiplied by as much as 100 times in Shanghai and Xi’an! And, third, consumer associations started complaining about the alleged illegality of the suppliers’ actions. In response to these developments, NDRC convened a meeting with the suppliers and, basically, asked them to suspend price rises for the time being.

An important feature of this case is NDRC’s wish to reign in inflation. With a rate of around 5% or more, inflation is considered high and many ordinary people in China are feeling the pinch. NDRC is –in addition to an antitrust enforcer- the country’s macro-economic planning body (it used to be the planning ministry allocating quota in the pre-reform and opening era), with a wide set of powers and responsibilities. Playing that role, NDRC may have felt the need to be seen as doing something about inflation.  So calling a meeting with suppliers and asking them to suspend price rises may have seemed like a good option. But this sounds more like traditional government intervention/industrial politics à la Sarkozy than modern competition law enforcement.  Indeed, the provision on which NDRC relied to impose the fine on Unilever would confirm this: Article 14(3) of the Price Law –a law that regulates prices (but also has a few antitrust provisions)– prohibits companies from “fabricating or disseminating information on price rises, driving up prices, and promoting excessive rises of product prices.”

The other effect NDRC probably wanted to achieve is to curb the panic buying by consumers.  To be honest, this seems more a problem of Chinese consumers –for historical reasons (ie, scarcity of products in the more distant past) and the attraction of speculation as a way to do business for some of them (ie, see also housing boom)– than of the suppliers. You may have heard that during the Japanese nuclear disaster Chinese people were panic-buying salt, following a false rumour that salt would help ward off radiation, which shot prices skywards.

But, the case is also interesting from a pure antitrust perspective: the issue is price signalling. The FAQ about the Unilever case posted on NDRC’s website contains some of the statements allegedly made by the Unilever representative:

“The everyday chemicals [ie, toiletries] industry is sufficiently competitive, with a great number of brands. Consumers are relatively price-sensitive and competitors are [closely] monitoring each other.  One can only make slight adjustments and see whether rivals follow suit.”

“Price rises go through a wait-and-see process [during which] everybody is waiting for the first one to adjust prices.”

”If our rivals do not follow suit, then we will surely suffer.  Therefore, we can only make gradual adjustments to product prices.”

”Next month, the prices for everyday chemicals of various manufacturers will be adjusted upward by around 10%.  This is mainly because of the recent price rise of around 40% on average of upstream raw materials such as petrochemicals, vegetable oil and inorganic chemical products, which has directly led to a 20% increase in the production costs of everyday chemicals.”

Also, the following sentence of NDRC’s press release shows that –beyond the unilateral announcements– one of the key issues underlying the authority’s allegations may have been that of tacit coordination among competitors by means of price signalling:

“Because business operators worry about losing market share, they are very cautious about raising prices.  By way of announcing price rises etc. ahead of time in a high-profile manner, [Unilever] tests market reaction through focused media reports and hopes that competitors follow the price rise.  It gave the competitors in the industry some time to reciprocally coordinate price strategies to achieve a coordinated price practice. While maintaining market shares unchanged, a collective industry price rise is implemented.”

So does that mean that, after all, NDRC was after collusive behaviour, not single-firm conduct by Unilever? (The fact that Unilever still appeared to insist on price rises after the NDRC decision and that there was no strong reaction from NDRC may be an indication that, indeed, one of the main issues might have been the alleged collusion). If so, then NDRC’s choice of legal basis for the sanction is very interesting.  Interesting because the Anti-Monopoly Law (AML) –China’s primary competition code– follows a similar approach as EU law, and NDRC might thus conceivably have thought about using the AML as a legal basis.  Like EU law, the AML defines agreements broadly as “agreements, decisions or other concerted practices.” A regulation implementing the AML, published by NDRC in January 2011, explains that a “concerted practice” has two elements: companies must have “communicated intentions” and their conduct must be identical.

“Communicating intentions” (意思联络) is a concept somewhat difficult to grasp (interestingly, there is a provision with almost identical wording in Taiwanese competition law). While some sort of communication is required, the law is not clear as to its extent and scope.  In that light, NDRC might have been tempted to bring the action against Unilever, Liby and the Nice group under the AML, to test the boundaries of this concept –perhaps alleging that the companies communicated their intentions to raise prices through the press.  Through the grapevine I heard that NDRC indeed considered, but ultimately dismissed, the AML option, seemingly because it did not feel fully convinced about the legal soundness of this approach.

Instead, NDRC brought the case under the “price hike” provision of the Price Law, which in principle applies to single-firm conduct.  And with this, its approach is similar to the proposal in the exposure draft of Australia’s Competition and Consumer Amendment Bill (No 1) 2011. So, could it be that China is –unexpectedly– at the forefront of worldwide competition law developments? If so, China would increasingly be in the spotlight and surely become subject to severe criticism, especially by those like Alfonso –and myself– who are sceptical about too stringent treatment of information exchanges under competition rules.