Anti-Trust Investigations Alarm Foreign Companies in China

A series of anti-trust investigations in China that seem to target foreign technology firms and automakers is causing concern about a new climate of protectionism and anti-foreigner sentiment.

Investigators from China’s State Administration for Industry and Commerce recently conducted two raids in as many weeks on Microsoft’s offices in connection with compatibility, bundling and file verification in Windows and Microsoft Office software.

General Motors, Audi and Daimler have also been probed in recent weeks over the issue of auto parts pricing. And chip maker Qualcomm, which sells wireless technology, has been under anti-trust investigation since last year, reports the New York Times. The investigation is related to patent licensing and the pricing of smartphone chips.

The campaign has alarmed the European Union Chamber of Commerce in China, which issued a statement on August 13. “The European Chamber has received numerous alarming anecdotal accounts from a number of sectors that administrative intimidation tactics are being used to impel companies to accept punishments and remedies without full hearings,” it said.

“In some of the industries under investigation, domestic companies have not been targeted for similar violations,” the statement continued. “Furthermore, in some cases that involve joint ventures, it has only been the foreign partner that has been named as being a party to the investigations.”

Anti-Monopoly Law

According to China consultancy Dezan Shira & Associates, the intensified scrutiny is connected to the Anti-Monopoly Law of 2008, which targets three types of monopolistic practices:

Monopolistic agreements. A horizontal agreements deals with issues such as price fixing, artificial limitations on production or sales, or boycotts of competitors or customers. Vertical agreements are defined as those in which two or more companies agree to manipulate resale prices.

Abuses of market position. These include selling at unfairly high prices, selling below costs, or imposing unreasonable trading conditions. A business is deemed to be dominant in a market if it has a market share of 50% or higher.

Anti-competitive mergers. Transactions exceeding certain thresholds, or those with repercussions for national security, require clearance from the governing authorities, a process which can take 30 to 180 days.

The monitoring and enforcement of these provisions is the responsibility of the Ministry of Commerce, National Development and Reform Commission, and State Administration for Industry and Commerce.

Generally, says Dezan Shira, an inquiry by the NDRC is the most serious of the three, owing to the agency’s reach and backing resources. Last year, the NDRC hit six companies in the infant formula industry with fines totaling US$109 million for anti-competitive behavior.

What Companies Can Do

“As seen in the case of Microsoft, enterprises under antitrust investigation typically become aware of the allegations against them only during a surprise raid in search of related evidence,” Dezan Shira observes.

“Where even politically well-connected companies like Microsoft are fair game for investigation, preparedness rather than prevention should govern the thinking of foreign investors,” it advises.

Foreign investors should review the accessibility and comprehensiveness of company documents, says Dezan Shira. “It is easier to cooperate with the demands of an investigation, lest a company be hit with additional fines for obstructing the progress of the inquiry.”

During the recent raid on its offices, it notes, Microsoft made senior management available for interviews and turned over contracts, financial records and internal communications. Under the Anti-Monopoly Law, investigators can also access company bank accounts.

An anti-monopoly investigation can take months or every years to complete and the fines can total 1% to 10% of the previous year’s revenue. “Unfortunately, in the face of a guilty verdict, there is little recourse for appeal to any agency other than the original investigator,” says Dezan Shira.

One ray of hope is the provision in the Anti-Monopoly Law that provides a way out for some companies. If a firm being investigated takes steps to eliminate the supposed monopolistic behavior, the suit may be dropped prior to the issuance of a fine.

“This is the strategy adopted by BMW, Mercedes and Audi,” says Dezan Shira. In response to antitrust investigations, they cut the prices of components delivered by their respective distributors in China by an average of around 25%.

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