Abstract
China, the world’s second largest and one of the fastest growing economy, employs a unique economic system that functions as an entry barrier for firms outside of China. As such, firms pay sharp attention to changes in government regulations. Enactment of the Anti-Monopoly Law of the People’s Republic of China also drew huge attention from investors abroad. The paper look into the background of the Anti-Monopoly Law, what the law aims to regulate, and three enforcement cases that had to do with merger. Enactment of the law took nearly twenty years, which implies how prudent the Chinese government was in adopting the law. However, considering that it was adopted in 2008, it is still at an infant stage. This is why the investors who are willing to invest in China will have to closely monitor the evolution of Anti-Monopoly Law that will continue over the years to come.
I. Introduction
China is one of the world’s largest, and also the fastest growing economy, with an average of 10% growth rate per year over the past 30 years. Many foreign investors have their eyes on China, as strengthened purchasing power and the vast population in China signal opportunity to the investors. Yet, China employs a unique economic system, which calls for more attentive measures to investors. The socialist market economy of China resulted in different rules and regulations from other countries. Among them, this paper will look into the law that protects competition, known as the Chinese Anti-Monopoly Law. The paper will first look into the background of its enactment and see what Chinese Anti-Monopoly Law prohibits. Then it will go through the agencies that enforce the law, and look into some cases made by the Ministry of Commerce of the People’s Republic of China (MOFCOM).
II. Adoption of the Anti-Monopoly Law
China’s Anti-Monopoly Law was enacted in July 2007, and has become effective as of August 2008. The background of adopting Anti-Monopoly Law can be summarized as follows: the change in national economic system, joining of the World Trade Organization (WTO), and importance of law in commercial disputes.
First, change in China’s economic system played a role in legislating the Chinese Anti-monopoly Law. Socialist market economy, as declared in Article 15 of the Constitution of China, means moving towards the free market economy from the previous planned economy. This new system required laws to settle economic disputes that would arise due to sudden changes. Second, joining the WTO in December 2001 made it necessary for the Chinese government to enact Anti Monopoly Law. It was due to the fact that some of the rules enforced the members of the WTO to enact such laws. Third, the need for law to settle commercial disputes would have played parts in this as well. Many international corporations have been increasing their market share in China, and foreign investments through corporate merger have also increased drastically. Consequently, the Chinese government must have realized the need of anti-monopoly law of its own.
In short, the Chinese government had to effectively control the side effects of free market economy, and the Anti-Monopoly Law was adopted as a tool. Several laws, such as 1993 Anti-Unfair Competition Law and the 1997 Pricing Law, existed to incorporate antitrust provisions and anti-competition conduct in China. Yet, these laws were confined in scope, were fragmented, and were rarely enforced. Accordingly, many have hoped that the Anti-Monopoly Law will provide a framework for more consistent and rigorous regulatory action against anti-competitive conduct in China.
III. China’s Anti-Monopoly Law
According to Article 3 of Chinese Anti-Monopoly Law, “monopolistic conducts” are defined as follows: (1) monopolistic agreements among business operators; (2) abuse of dominant market positions by business operators; and (3) concentration of business operators that eliminates or restricts competition or might be eliminating or restricting competition.
1. Monopolistic Agreement
As Article 13 defines, “Monopolistic agreement” refers to; (1) fixing or changing prices of commodities, (2) limiting the output or sales of commodities, (3) dividing the sales market or the raw material procurement market, (4) restricting the purchase of new technology or new facilities or the development of new technology or new products, (5) making boycott transactions, and (6) other monopoly agreements as determined by the Anti-monopoly Authority under the State Council.
When business operators violate this law by reaching a monopoly agreement, the anti-monopoly authority will order them to cease doing so, confiscate illegal gains, and impose a fine of 1% to 10% of the sales revenue in the previous year, under Article 46.
2. Abuse of Dominant Market Positions
It is stated in Article 6 that a business with a dominant position may not abuse its dominant position to eliminate, or restrict competition. To determine dominant market status, the following factors are considered; (1) market share of a business operator in relevant market, and competition situation of the relevant market, (2) capacity of a business operator to control sales markets or raw material procurement market, (3) financial and technical conditions of the business operator, (4) degree of dependence of other business operators upon the business operator in transactions, (5) degree of difficulty for other business operators to enter the relevant market, (6) other factors related to determine dominant market position of the said business operator.
The types of abuse business operators with a dominant market position are prohibited from are listed in Article 17; (1) selling commodities at unfairly high prices or buying commodities at unfairly low prices, (2) selling products at prices below market price without any justifiable cause, (3) refusing to trade with a trading party without any justifiable cause, (4) requiring a trading party to trade exclusively with itself or trading exclusively with a designated business operator(s) without any justifiable cause, (5) tying products or imposing unreasonable trading conditions at the time of trading without any justifiable cause, (6) applying dissimilar prices or other transaction terms to counter parties with equal standing, and (7) other conducts determined as abuse of a dominant position by the Anti-Monopoly Authority under the State Council.
3. Concentration of Business Operators
According to Article 20, concentration refers to the following circumstances; (1) merger of business operators, (2) acquiring control over other business operators by virtue of acquiring their equities or assets, or (3) acquiring control over other business operators or possibility of exercising decisive influence on other business operators by virtue of contact or any other means.
The means to business concentration can be classified into three ways. The first is through corporate merger. The Anti Monopoly Law does not devote to explain general idea of corporate merger, but it can be understood as merger in Corporation Law. The second method is through shares or assets acquisition. This allows direct control of businesses, and stand as a typical method of business merger. The third is through wncontracts that allow business control or yield influential status. Establishing a joint venture company, becoming a board member, getting a permit for intellectual property that enables actual control or influence over the business are some of the examples.
IV. Enforcement Agencies of Anti-Monopoly Law
Whereas Korea Fair Trade Commission has a single enforcement agency to rule out businesses that violate Monopoly Regulation and Fair Trade Act, China has three enforcement agencies to enforce Anti Monopoly Law. They are known as National Development and Reform Commission (NDRC), State Administration for Industry and Commerce (SAIC), and Ministry of Commerce People’s Republic of China (MOFCOM). Each enforcement agency deals with different issues. NDRC deals with monopolistic agreements among business operators, SAIC deals with abuse of dominant market positions by business operators, and MOFCOM deals with concentration of business operators that eliminates or restricts competition, which can be understood as corporate merger.
V. Corporate Merger Restriction Cases
1. Coca-Cola – Huiyuan Case
Coca-Cola and Huiyuan was the first corporate merger case that was denied by MOFCOM after the enactment of Chinese Anti-Monopoly Law. Coca-Cola proposed an acquisition of the Chinese juice company Huiyuan at the cost of US $2.4 billion. However, it was denied by MOFCOM. MOFCOM listed the following as the reasons for denial: (1) The acquisition would allow Coca-Cola to have dominant position in the carbonated soft drinks market within the fruit juice market, which would affect other fruit juice competitors and harm competition; (2) The transaction would increase the entry barriers to the juice market because it would allow Coca-Cola to have an effective control over the Chinese juice market through Minute Maid and Huiyuan, which are two well known brands; (3) The deal would harm competition in the Chinese juice market because it would decrease the ability of mid and small-sized juice companies to compete and innovate.
The decision provoked controversy. Antitrust bar outside China were saying that the decision was nationalistic and the acquisition would not have harmed competition. Although China denies it, the Coca-Cola/Huiyuan decision shows procedural deficiencies in the Chinese Anti-Monopoly Law. The analysis by MOFCOM was oversimplified, short, and unclear. To decide whether a business merger restrict competition, relevant market has to be defined. Defining “relevant market” which addresses the product and geographic dimensions of market definition, is an important procedure. This is due to the fact that a big relevant market would relatively make a business to be less monopolistic, and vice versa.
Yet, Chinese Anti-Monopoly Law at the time did not have guidelines for relevant market. According to Article 12 of the Anti-Monopoly Law, relevant market is only defined as follows; “‘relevant market’ refers to the commodity scope or territorial scope within which the business operators compete against each other during a certain period of time for specific commodities or services (hereinafter generally referred to as ‘commodities’)” In effect MOFCOM’s final conclusion was entirely different from what the Coca-Cola Company had been expecting. The Anti-Monopoly Law saw that Huiyuan owns 46% of China’s pure fruit juice market, and had significantly dominant position. On the contrary, Coca-Cola saw that the combined market share would be less than 20% of China’s juice market. Since then, MOFCOM announced “Guidelines for Definition of Relevant Market” in August 2008. However, Chinese government’s detailed guidelines are yet to be confirmed.
2. GE(China) and Shenhua Coal Oil Case.
After the Coca-Cola case, there has not been another case that prohibited corporate merger. Rather, MOFCOM imposed behavioral remedies according to Article 29 of the Anti-Monopoly Law. The Article states that where concentration is not prohibited, the Anti-Monopoly Authority under the State Council may decide to attach restrictive conditions for reducing negative impact of such concentration on competition.
In November 2011, MOFCOM decided a qualified consent toward a joint venture between GE and Shenhua, which was invested 50% each by the two companies. The joint venture possessed technology that extracts gas from slurry mixed with coal and water. Extracting gas from slurry would put the joint venture in an independent position, for the technology is very different from the other technologies that extracted gas from coal. MOFCOM thoroughly determined the relevant market, and also put the influence of indirect market in to account. The agency figured that licensing of the technology could limit or restrict the competition by empowering them with dominant market position. On this account, MOFCOM gave conditional consent.
The decision is significant as it is the first official MOFCOM decision made regarding a joint venture. This made it clear that joint ventures could potentially affect market concentration, and are in need of prior consent by MOFCOM
3. Microsoft and Nokia case
On April 8, MOFCOM approved Microsoft’s acquisition of Nokia’s mobile headset business. The acquisition dealt with licensing of standard essential patents (SEPs), and non-SEPs in the IT sector. Although the acquisition was approved in the EU and US without remedies, it took MOFCOM seven months to approve of the transaction. MOFCOM concluded that the proposed transaction risked eliminating and restricting competition in smartphone market in China.
First, MOFCOM analyzed the “vertical relationship” between Nokia and Microsoft. MOFCOM reviewed, focusing on three product categories: (1) smartphones, (2) operating systems (OS), and (3) patent licensing related to smart mobile devices. MOFCOM concluded that smartphones and OS each constituted a single product market, and that a group of patents that address the same functionality could constitute a separate product market.
Then, MOFCOM considered the impact of transaction on the relevant markets, and found that the transaction may eliminate or restrict competition in China’s smartphone market both on Microsoft’s side and the Nokia’s side. MOFCOM stated that Microsoft’s patents covered by the Android program license include technology that is “essential” for the production and manufacture of Android phones, which make up more than 80% of the Chinese smartphone market. MOFCOM further noted that whereas Microsoft has the motivation to increase competitors’ costs by raising its patent royalty fee, Chinese smartphone manufacturers lack the “strength” to compete with increased royalty rates.
On Nokia’s side, MOFCOM found that “Nokia has controlling power over the smart phone market.” MOFCOM posited that Nokia has “thousands” of standard-essential patents relevant to telecommunications and was a “leader” in that area “in terms of patent quantity and quality,” and that its patents are essential to manufacturers engaged in production activities.
Consequently, Nokia and Microsoft submitted their final solutions. The commitments of Microsoft include: (1) Do not seek injunctive relief on Android phones produced by Chinese manufacturers based on the standard-essential patents. (2) Use non-exclusive license on Android phones using Microsoft’s patents, and the fees and other licenses after the transaction will not exceed the current level; Microsoft may give preferential treatment based on market conditions and the specific circumstances of the licensee. (3) For non- Standard Essential Patents(non-SEPs), injunctive relief will only be sought in the case that the potential licensee may not negotiate in good faith. (4) The commitment on standard-essential patents will be permanently effective, whereas the commitment on nonstandard-essential patents will be valid for eight years.
The commitments of Nokia include: (1) Continue to follow the fair, reasonable and non-discriminatory (FRAND) principles on standard-essential patent license, and do not pursue licensing terms that are not in compliance with the FRAND principles. (2) Do not prevent the implementation of the standard-essential patents through the injunctive relief to the licensee acting in good faith. (3) Do not make tie-in sales with the license of standard-essential patents. (4) The transferee of Nokia’s standard-essential patents should also be bound by the obligations under these commitments as well as the FRAND principles. (6) Nokia promised not to deviate from the current FRAND piecework rates, but would allow reasonable adjustments based on these factors. (7) These said commitments will be permanently effective.
The decision is significant in that MOFCOM was concerned about the intellectual property rights owned by the parties, and imposed remedies if it viewed such rights can be misused.
VI. Conclusion
The paper looked at the background of the Anti-Monopoly Law in China, what the law aims to regulate, and the agencies that enforce the law. Then, the paper especially looked at cases related to merger, as merger is the most often used method when entering into an entirely different business environment.
Several flows can be found through the MOFCOM decisions. First, Anti-Monopoly Law is regulated by three different enforcement institutions. This could make it difficult to result in one unified decision. Second, unclear definition of ‘relevant market’ is a problem, as an arbitrary decision by a Chinese official could be made. Third, the GE/Shenhua Coal Oil case settled MOFCOM’s official position regarding the merger of national corporations and venture companies.
Implementation of the Anti-Monopoly Law shows China’s cautious move to blend in with the international economic practices. However, as Gu and Chen commented, ‘to some extent, the Anti-Monopoly Law is still at an infant stage and its development needs to be compatible with its social environment’. Through the cases during the past six years, Chinese enforcement officials have gained experience in dealing with anti-competition cases, and they are making Anti-Monopoly Law. The vast and undeveloped, yet the world’s fastest growing and second largest economy allure many firms to enter into the market. For these reasons, business owners who attempt to broaden their customers in China need to monitor Anti-Monopoly Law closely, and see how the rules and regulations develop.
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