Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

Chinese Antitrust Law- The Year of the Rabbit in Review (Part 2)

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(As you will recall from last week, with occassion of the Chinese New Year we are publishing a year-in-review trilogy by our friend and “China correspondent” Adrian Emch. This is part two of Adrian´s review of 2011.  Enjoy!)

The investigation by the National Development and Reform Commission (NDRC) into the practices of China Telecom and China Unicom had a significant impact inChina. It was one of these cases that people outside the antitrust community actually notice.

The reasons for the high-profile nature of the case may be manifold. For one, most consumers in China will have been a customer of one of the two, in one way or another. Two, the fact that an NDRC official talked to the press while the investigation was ongoing and said that the fine could amount to 1 to 10% of the companies’ annual turnover might have contributed to drawing attention to the case.  But, three, perhaps most significantly, the media’s focus on this case may stem from the fact that China Telecom and China Unicom are state-owned enterprises (SOEs), and very powerful ones at that.  Therefore, it is possible that the main reason for their interest in the case is the surprise, or even disbelief, that someone like NDRC’s antitrust officials would dare take on the two SOEs.

Hence, perhaps the most fundamental underlying question in the China Telecom and China Unicom case is whether and to what extent the Anti-Monopoly Law (AML) applies to SOEs – in law and in practice.  For the international audience, the answer to this question is important: if the AML were in practice not to apply to SOEs, then the targets of the agencies would be private Chinese companies and foreign companies.  For the former, many of them are young companies, which generally do not enjoy much support by the State.  So their market position inChina’s “transitional” economy may not be too prominent, as a general rule.  Which would leave …foreign companies as enforcement targets.

The fear that the AML would be used as a weapon against foreign companies was there from the very beginning of its enforcement.  So let’s take a good look to check whether or not this fear was justified.

For this analysis, it makes sense to distinguish three different areas of the law: agreements, abuse of dominance, and merger control.  For agreements, first, the situation is straight-forwarded.  The cases were essentially about cartels, and a majority of them were local cartels arranged through trade associations such as the price-fixing of sterilization products for tableware in Xiamen, the price-fixing by the paper industry association in Fuyang, or the market-partitioning by a construction equipment industry association in Lianyungang.  The exception in the agreements area is the Unilever case, where a fine was imposed on only one of the four companies whose activities were under scrutiny (two of which Chinese): Europe-headquartered Unilever.

Second, in my view, the abuse of dominance area saw the biggest surprises.  The targets under the abuse of dominance rules were mostly Chinese companies, both privately-owned (ie, Baidu, Shanda) and state-owned companies (ie, China Netcom, China Mobile, Hubei Salt).  Most of these cases were private actions before courts, with a few exceptions.  Interestingly, to the best of my knowledge, all of these actions were ultimately dismissed or settled; as far as I know, there has not been a judgment finding an abuse of dominance under the AML. (Meanwhile, an investigation that SAIC was rumoured to be conducting against a Europe-based multinational does not appear to have led anywhere.)

Perhaps most importantly, NDRC started tackling SOEs.  Even before the China Telecom and China Unicom case, NDRC published a decision against the local salt distributor in Hubei province, which had an “exclusive right” (as within the meaning of Article 106 TFEU) to distribute edible salt at the wholesale level in the entire province.  The issue NDRC had was that the salt company bundled the sale of edible salt with cloth washing powder.  However, NDRC only warned, but did not fine, the salt company for a variety of reasons, namely the company’s willingness to cooperate during the investigation and to take back unwanted washing powder from retailers, the limited sales volume and value involved (only 200 pieces of powder, worth RMB 20,000 – around EUR 2,500), and the company’s formal commitment to cease the infringement and subject itself to temporary monitoring by the authority.

So, overall, it would be definitely wrong to say that the abuse of dominance rules have been targeted at foreign firms in a discriminatory way.  Still, this area of the law is clearly a work in progress: if the China Telecom and China Netcom investigation were to end in a settlement – which most observers think is the most likely outcome – then this would be already the second time (after the Hubei Salt case and, perhaps, a similar investigation in Jiangsu) that commitments are used to terminate an investigation against an SOE.  The message sent by NDRC to market players could be that SOEs are subject to the AML from the substantive point of view but, procedurally, commitments are enough to put the investigation to an end.

In the merger area, close to 400 transactions have been notified to MOFCOM since the AML came into force in August 2008. The largest part of notifications was cleared unconditionally. MOFCOM imposed conditions in ten cases, and blocked one (and a few cases were withdrawn).  Of these 11 cases with “adverse” decisions, only two involved Chinese companies.  On the one hand, the target of Coca-Cola’s attempted takeover in 2008/9 was Huiyuan Juice.  That company is incorporated in the Cayman Islands and listed in Hong Kong but, as a practical matter, is considered a Chinese company. However, precisely, prohibiting a foreign company to acquire a “Chinese” company awoke fears of discriminatory application of the AML.  MOFCOM responded to these concerns by shedding light on the reasons for the Huiyuan decision – conglomerate effects, it said – and by explaining that the fact that remedies were imposed basically only on foreign deals was because the companies involved had strong market positions, implying that the situation may not be the same for Chinese companies.  Which may be true for many private companies inChina. But the many cases brought against SOEs under the abuse of dominance provisions suggest the same is not necessarily true for state-owned companies.

To this extent, it was definitely newsworthy to see that, in the General Electric/Shenhua transaction in November 2011, MOFCOM for the first time imposed remedies in a deal involving a Chinese company – even a large SOE.  As background, the transaction concerned the establishment of a joint venture between subsidiaries of General Electric and the Shenhua Group, a Chinese energy giant.  The goal was that General Electric would grant the JV a license of its technology that converts solid coal into coal gas to be used to generate power, among other applications. Post-transaction, the JV would engage in technology licensing in China. As Shenhua is the largest producer of the special-property coal needed for that process, MOFCOM seems to have been concerned in particular about potential tying by Shenhua of its special-property coal with the JV’s technology, thereby excluding competitors in the technology licensing market.

As in the abuse of dominance area, the glass in the merger area is half empty and half full. True, the General Electric/Shenhua decision was addressed to a Chinese SOE (in addition to a foreign company), and MOFCOM was reported to have unconditionally cleared two high-profile acquisitions of well-known Chinese brands by foreign companies – that is, the “Coca-Cola/Huiyuan situation” so to speak – towards the end of 2011 (Yum!/Little Sheep and Nestlé/Hsu Fu Chi).  But, at the same time, no transaction between exclusively Chinese companies has ever been subject to an “adverse” decision.  (Incidentally, MOFCOM itself had complained that the restructuring of the telecoms sector, in particular China Unicom acquiring China Netcom was not notified to it under the merger control rules). The guess here is that, as a part of the Chinese government is understood to have encouraged (or may perhaps even have “ordered”) this transaction, MOFCOM would be reluctant to “second-guess” it.

Interestingly, the application of competition law to Chinese is also a hot topic … in the EU.  In China National Blue Star/Elkem, DSM/Sinochem and China National Agrochemical Corporation/Koor Industries/Makhteshim Agan Industries, the European Commission examined whether Chinese SOEs constitute a single “economic entity” for the purposes of EU merger control (with the obvious implications for both notifiability and competitive assessment).  So far, the Commission has not taken a firm position. Incidentally, if all Chinese SOEs (or at least those owned by the central government) together were a single “undertaking,” then China Unicom’s alleged failure to file the China Netcom acquisition could actually make sense: seen in that light, this could be an intra-group transaction, not subject to merger control in China.  Anyway, I am going astray; perhaps more of this some other time.

To conclude, overall, the AML has not turned out to be the instrument to go after foreign companies, as some observers had feared. Generally speaking, there are indications that the law is being applied in a measured way and, to a certain but not full extent, equally to all market players. Clearly, though, the practice until now does not allow the brushing aside of allegations that SOEs are a bit more equal than others – both in the abuse of dominance and merger context. The China Telecom and China Netcom case could be important, as it might set the direction into which AML enforcement will be going.

Written by Alfonso Lamadrid

1 February 2012 at 6:45 pm

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