China’s Anti-Monopoly Law (AML) finally came into force on 1 August,
2008, nearly one year after its promulgation by the Standing Committee
of the National People’s Congress and 14 years since it first started
being debated in 1994. In a nutshell, it has most of the features one
would expect to see in the law, similar to Europe, the U.S. and
Australia, such as the prohibition of monopolistic practices, including
monopolistic agreements, abuse of dominant market position and
concentrations that have or are likely to have the effect of preventing
or restricting competition. It also establishes a pre-concentration
notification requirement for mergers of a certain size and establishes
penalties such as fines, civil liability or even criminal liability.
Detailed implementation regulations should be gradually released to
further clarify the application of the law.
The AML is certainly a welcomed addition to the ever growing Chinese body of law and a remarkable achievement that gives China a modern competition law. However it also contains some specific features that may cause concern to foreign companies already operating in China as well as to those still looking to enter the Chinese market. We will focus on what have been perceived to be the most controversial issues:
Regarding the enforcement of the law, it appears there will be three departments involved in overseeing its implementation:
- The Ministry of Commerce (MOFCOM) will supervise concentrations;
- The State Administration for Industry and Commerce (SAIC) will analyze monopoly agreements and abuses of dominant market positions;
- The National Development and Reform Commission (NDRC) will continue to oversee the formation of prices.
Of the three, SAIC is the most experienced in dealing with anti-monopoly practices, with over 70,000 employees working on fair trade cases and having handled over 6,500 monopolistic cases to date under the Anti-Unfair Competition Law. However, with the participation of MOFCOM and the NDRC, there is a real risk of overlapping functions and an internal struggle for power, with resulting uncertainty and the possibility of lengthy analyses.
A quite different concern, the scope of the law, has been another major point of contention. The AML asserts that the State protects the lawful economic activities of State Owned Enterprises that “occupy a controlling economic position” in “Industries which are related to the economic lifeblood of the national economy” or “Industries related to national security” and in “Industries which have, in accordance with law, monopoly operating and sales rights”. Depending on how one interprets the law, a large number of SOE’s may actually fall outside the law, and it is typically these companies that hold monopolistic positions in China.
Further to this, the timing of the AML is interesting to say the least – in several industries the government is actually strongly encouraging consolidation as a means to alleviate excessive competition, improve profits, modernize technology and create national champions. In Cement the plans point to a reduction of the number of enterprises from 5,000 to 3,500 and, most significantly, an increase of the market share of the top10 companies to 30% with the government publishing a list of 60 companies to support. In the meanwhile, the recent restructuring of the Telecoms saw 6 companies merge into three, and in Aviation there are persistent rumors that the big 3 should become just the bigger 2, with China Eastern being the weak link.
Finally, in the Steel industry, the beginning of July saw the merger between Tangshan Iron & Steel Group and Handan Iron & Steel Group that created the largest producer in China and the 5th largest in the world – consolidation has been encouraged to rationalize the industry structure and eliminate obsolete facilities
Also worrying is the mechanism for reporting. An individual or a company can report instances of monopolistic behavior to any of the enforcement bodies, who in turn will not disclose the information publicly. This could easily provide opportunities for companies (or its local governments) to raise false claims against rivals.
There is also the possibility that intellectual property rights may not be duly protected. Although the law states (Article 55) that its provisions “do not apply to Business Operators exercising their intellectual property rights” in accordance with IP laws, it does state that it is applicable “to cases where a Business Operator abuses its intellectual property rights in order to exclude or restrict competition”. Since the wording is quite loose, there is room for discriminatory action against certain foreign entities, eg. technology-focused groups, with significant market share.
In fact, just days after the AML came into force, local media was already reporting on the intention of a few Chinese companies to use the AML against Microsoft. Pharma has been another sector where fears of an excessive use of the AML have been voiced, as foreign companies account for a relatively large share of the Chinese market and may be accused of overpricing.
Irrespective of the issues described above, the AML is sure to have a very significant impact the commercial activities of foreign companies in China:
- For companies considering entering or expanding in China, they must ensure that their M&A activities comply with the new legislation. As part of the process of due diligence and negotiation, the market position of the acquiror post-deal must now be thoroughly assessed; this may lead to a sell-down of part of the operations of the acquiree, a search for other targets or simply a cancellation of the deal.
- For companies already in China, whose current competitive position might be construed as monopolistic, it will be essential to assess their market position (what agreements are in place, the situation regarding IP, whether a case can be made against the company for activities akin to a dominant market position, etc.) and to identify major risks. Based on this assessment, the company should then create a blueprint for ensuring AML compliance.
Regardless, as important as the AML is, it will actually be the way in which it is enforced that will ultimately be the judge of its merits.
Capital Eight is an investment bank headquartered in Shanghai, specialized in M&A, project-structured finance and public/private fund raisings.
http://www.capitaleight.com/
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