China’s anti-monopoly law: regulators and resolution

With high-profile raids hitting international companies in China whether from the EU, US or Japan, China’s recent high-profile enforcement of the Anti-Monopoly Law is raising the eyebrows of the international business community in China and around the world.

This appears to be a trend that will continue to be a part of business operations.  

Unfortunately, enforcement of the Anti-Monopoly Law, like many aspects of life and business in China, is unclear and difficult to predict. Rules and regulations have sufficient room for interpretation to make internal administrative dynamics between organisations, or even individuals, a very important part of the story.

Enforcing the Anti-monopoly Law: the New Norm

As part of its deep economic transformation, China has developed its Anti-Monopoly Law, passing into law in 2007. Like many administrative regulations in China, implementation had been sketchy until 2013, sparked up in 2013, and continued in force throughout 2014, hitting headlines in the summer with major raids and investigations into giants such as Microsoft, Qualcomm, Mercedes-Benz, Honda and Toyota.

A key marker of the coming attention in this area is illustrated in the State Council’s Opinions of the State Council on Promoting a Fair Market Competition and Maintaining the Normal Market Order from July 2014 which highlighted that China would “strictly punish monopolies and unfair competition”.   

With this Order delivering official encouragement, government supervisory agencies are now rolling out the enforcement of the Anti-Monopoly Law to ‘protect fair market competition as China transitions toward a market economy’.

Is Enforcement a Surprise?

Well, no. In many ways, a properly functioning anti-monopoly or anti-trust law, as it is sometimes known, is a key feature for a market economy. Indeed, in developing its Anti-Monopoly Law, China has drawn on both the EU and US regulatory frameworks, and both the EU and US periodically announce investigations into corporations accused of monopolistic behaviour.

Is it a surprise that foreign companies have been the most effected by the Anti-Monopoly Law’s implementation so far? Also no. Although the media (both Chinese and international press)  have focused on Multi-National Companies (MNCs), some big Chinese State-Owned Enterprises (SOEs) companies have been targeted by the Law too, such as China Telecom / China Unicom, the major Mao Tai / Wuliangye spirit producers and the Shanghai Gold and Jewellery Trade Association.

It’s not a surprise that, given their size and expertise, that MNCs and SOEs are more likely to dominate their market sectors and be a focus for Chinese regulators. Many of the companies targeted in China have, at some point, been in the spotlight of regulators in Europe and the US too.

So is this just an issue of perception, or are there problems with the enforcement of the law?

(Un) Fair Enforcement?

Unfortunately at present there are a range of issues impacting the enforcement of the Anti-Monopoly Law (AML) about which MNCs should take note.

1. Unclear division of responsibilities between the anti-monopoly regulators

For example, when the National Development and Reform Commission (NDRC, one of the regulators responsible for enforcing the Anti-Monopoly Law) probed Qualcomm’s allegedly monopolistic behaviour, the investigation covered both price and non-price related issues, despite the existence of a regulation that the NDRC should only be responsible for price-related issues. In this way NDRC exceeded its apparent jurisdictional authority.

2. Pressure on Regulators from within the Government

The Chinese government system is designed to build consensus in decision-making which may affect the independence of enforcement decisions.

While undertaking investigations, government bodies invite opinions from other ministries, local governments, and associations. For major investigations other interested parties may have a strong interest in proceedings and can exert pressure to have their views considered. There is the possibility that pressure from another Ministry could alter the direction of an investigation from a competition-led one to that considering overweighing industrial policies, i.e. that might favour a domestic company over an international one.

3.  Regulations guiding enforcement are widely open to interpretation.

For example, one criteria for reduced punishment in article 7 of the Rules on Regulating Administrative Price Penalization Rights is whether the subject “may learn from lessons from receiving lighter punishment”. Other criteria include whether the subject “is engaged in minor illegal activities that have not resulted in serious consequences”, “are willing to rectify illegal activities”, or “other circumstances may be subject to lighter punishment according to law”.

Guidelines such as these are vague and leave considerable room for law enforcement staff to use their discretion during enforcement.

The level of fines can vary considerably, ranging from 1%-10% of the previous year’s corporate revenues. Given the above regulations, the fines may vary significantly based on the offenders’ attitude to, and relationship with regulators rather than solely the nature, offense and duration of illegal activities.

In addition, there are also many related issues remaining to be explained. For example, how should the enforcement of the Anti-Monopoly Law be supervised? How should areas with a deliberate administrative monopoly be regulated, i.e. electricity generation or tobacco manufacture? And how should the Anti-Monopoly Law be integrated with intellectual property rights?

What does this mean for us?

As Anti-Monopoly enforcement is becoming a part of business life in China, MNCs clearly need to be careful with their operational strategies in China, those connected to sensitive issues relating to the Anti-monopoly Law such as price collusion, discrimination and unfair pricing.

There are many things an MNC should do when investigated. For example, having a helpful attitude and a willingness to work with investigators will obviously be important.

However one thing stands out: because the Anti-Monopoly Law is subject to broad interpretation and influence from other government agencies, a response to an investigation that focuses on legal issues arguing the fairness of implementation according to the law may overlook significant dynamics within the governmental system.

This makes MNCs’ government affairs/public affairs functions and their relations with regulators extremely important. This function needs to determine the reasons for the investigation and the motivations of all involved stakeholders quickly in order to build an effective strategy that will appease their concerns.

MNCs concerned about Anti-Monopoly investigations should spend time and effort building up their government affairs capability. This includes their engagement with government stakeholders, overall reputation and ability to draw on external support when necessary.

Finally, as mentioned above, there is plenty of scope for policy development in this area and MNCs should take an active role in policy development. However, this can be quite a challenge given Chinese Ministries’ tendency to favour very short deadlines and the provision of information only in Chinese. This makes it doubly important to establish careful monitoring and communication channels to take advantage of opportunities, as well as warning alerts.

Author

Mark Pinner

Managing Partner, China

1 Comment

  • Walter Clark says:

    United States should have a similar law to China’s by cutting down prices (or costs) on everyday items that people typically use or eat everyday like food, esp. meat, milk, or ice cream, etc., prescription drugs, food at a fast-food restaurant that people like to eat, vacations, or cars and trucks, and gas used in them, and doctor’s visits.
    Executives, who would own lavish cars or mansions, from money used from high-cost items should be fined, be arrested, and be banned from a company who would raise a cost of a item, such a prescription drugs, cars, or gas, by making it more expensive that would not be affordable, that would hurt people who are poor, or on low income, to help protect consumers and help keep prices down, so people who are on low-income can buy more items.
    These companies in the U.S. like China’s should have a much stricter policy by cutting prices down, and fire (or remove) executives who do Monopoly practices, by raising cost of items up, by keeping prices low.

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