Professor Ang looks at China’s campaign against anti-competitive behaviour and asks whether foreign firms are being targeted

By Siah Hwee Ang*

Chinese regulators have recently ramped up their efforts on foreign companies’ anti-competitive behaviour.

This has generated a reasonable level of unrest among major foreign companies in China.

Such campaigns are not new.

On and off, in the last couple of years in particular, there have been cases whereby Chinese regulators have involved themselves in a market economy that they seek to create.

We get to see more action these days as Chinese regulators become more familiar with handling anti-competitive behaviour.

The reform has deemed it necessary that the country get more involved in market competition as it tries to establish a market economy that is fundamentally sound.

This will take time.

So for the time being, foreign companies will just have to live with a higher level of uncertainty.

The campaign

China’s anti-monopoly law came into force in August 2008. It is governed by three different state agencies, namely the Ministry of Commerce (in charge of merger issues), National Development and Reform Commission (in charge of pricing issues), and State Administration of Industry and Commerce (in charge of non-pricing issues such as quotas etc.)

More than 1,000 companies have been probed in recent times.

Eyewear makers, including Johnson & Johnson and Bausch+Lomb were fined in May 2014 for excessive control over prices.

Most recently, the National Development and Reform Commission investigated three auto makers and 12 auto parts and bearing suppliers.

Jaguar Land Rover China immediately decided to cut the price of three of its models by an average of about NZ$39,000! One of these models was selling at about NZ$565,000. Mercedes-Benz, Chrysler and BMW would also cut their spare part prices by an average of 20 percent.

The 12 Japanese auto parts and bearing suppliers were quoted from the National Development and Reform Commission as having held bilateral and multilateral meetings between 2000 and 2011 to fix prices.

The group was fined a total of NZ$242.5 million.

This is by far the largest fine imposed by Chinese regulators using anti-monopoly law. The highest previous fine was that imposed on six dairy companies in August 2013 - NZ$130.8 million.

The typical outcome of violating an anti-monopoly law is the rectification of price-cutting and a fine.

Are foreign companies being targeted?

As part of reform, the Chinese government is conscious about public concerns with China’s soaring prices in some cities. Some of the industries with high prices happen to be dominated by foreign companies, for example auto and heath care.

One can also say that foreign companies dominate in industries where domestic players are weak. As such, particular industries have been targeted as protectionism sets in.

If we look back, South Korea and Japan have exercised a higher level of protectionism at comparable stages of development in comparison to China.

On the other hand, there have also been apprehensions of domestic players because of anti-competitive behaviours as well.

Domestic baiju (Chinese white spirits) producers Kweichow Moutai and Wuliangye Yibin were fined a total of NZ$87.8 million for resale price violations.

Shanghai Gold and Jewellery Trade Association found to have facilitated the formation of a price-fixing agreement between five major gold retailers in Shanghai. The Association was fined NZ$98,000 while the five retailers were fined a total of NZ$1.96 million.

Thirty-nine retail and tourism companies in Yunnan and Hainan were fined a total of NZ$3.52 million for price fixing.

And just last week, 23 provincial insurance companies and Zhejiang Insurance Industry Association were fined more than NZ$21.5 million for fixing new car insurance discounts and other anti-competitive practices.

A good test to see if there is a bias against foreign companies in this campaign is whether actions will be taken under United States or European Union laws. That is, would companies be able to get away with excessive margins? Would collusion be pinpointed immediately or be left to the market?

When the dust settles

Literally all the firms that come under scrutiny of violating the Chinese anti-monopoly law have expressed their willingness to cooperate. That is the probably a wise response. As any other responses could have led to further complications and risks being left out of the market.

Of course as most of these cases include multiple companies, chances are that prisoners’ dilemma has been applied - where a party is worse off if other parties admit to mistakes while it doesn’t.

China’s execution of its anti-monopoly law has been relatively rare in the last few years so foreign companies may not be used to it, though they should be more familiar with the same type of examination in more developed countries. Chinese regulators’ intervention is an effort to create a market economy that at this point cannot be left alone to the market itself.

It’s important for everyone that Chinese consumers will be keen to continue to spend and their ability to do so is critical.

Chinese consumers are increasingly travelling to buy luxury goods from abroad, as these are much cheaper than those they can get from China. This has forced luxury goods brands to reduce prices without intervention from Chinese regulators - market forces work in that case.

At the end of day, quality always wins and with this foreign companies in most industries continue to have an edge.

Foreign companies will have to compete on good quality with reasonable and honest premiums.

Otherwise, the good prices provided by domestic players with good-enough quality products and services will have the last laugh.

That day might not be far from what we can see from the likes of Lenovo, Haier, Huawei and Xiaomi.

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Professor Siah Hwee Ang holds the BNZ Chair in Business in Asia at Victoria University. He writes a regular column here focused on understanding the challenges and opportunities for New Zealand in our trade with China. You can contact him here