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Anti-monopoly Probe and Enforcement in China – Paying the Price for Price!

Shortly after the sixth anniversary of effectuating the PRC Anti-monopoly Law, the National Development and Reform Commission (the NDRC) and its local branches made front page news with respect to an enforcement focus on automobile and related upstream and downstream industries. As of Sept. 28, NDRC has formally issued 12 decisions to 12 Japanese auto component manufacturers — two immunity decisions and 10 punitive decisions — with total monetary penalties of RMB1.2 billion (approximately $195.06 million). NDRC’s local branches, such as Shanghai NDRC, also penalized a U.S automobile manufacturer. Moreover, the NDRC currently is investigating a telecommunication giant and other automobile manufacturers. The reason for this enforcement barrage is very straightforward: price fixing will not be tolerated by the NDRC.

Price Fixing Is Prohibited In the PRC

PRC Anti-monopoly Law provides that business operators are prohibited from concluding horizontal agreements on fixing prices in any way, if it has an effect or will result in eliminating, restricting, or disordering competition in a relevant market. Also, business operators are prohibited from restricting or fixing the resale prices of products resold by their distributors or retailers — vertical price fixing — if they have the same effect as is prohibited for horizontal agreements. In addition to business operators, industrial associations are prohibited from organizing business operators in an attempt to reach arrangements that resemble horizontal or vertical agreements.

In a typical enforcement action, Company A, “a leading supplier of advanced automotive technologies, systems and components for all the world's major automakers,” as stated on the company’s global website, was found by the NDRC to have engaged in frequent bilateral or multilateral negotiations with its competitors – one or more of the 11 Japanese auto components manufactories simultaneously penalized by the NDRC – by way of meetings, emails and conference calls from the second half of 2000 up to October 2009, to have exchanged information with respect to the prices of certain auto components as well as the proposed quotes for bidding for business with automobile makers in China, resulting, according to the NDRC, in massive agreements on bidding prices. The products involved were distributed in China to some automobile makers. The NDRC concluded that the agreements had an impact on eliminating, disordering and restricting competition in the relevant market, which directly increased the prices of the auto components involved, and indirectly seriously disadvantaged and jeopardized the interests of downstream automobile dealers and end user consumers. The NDRC imposed a total penalty of roughly RMB150 million (approximately $243,831.07), which accounts for 4 percent of sales generated from the products under the Horizontal Agreement in China in 2013.

However, among all 12 decisions, two companies were not penalized, including Company A. Although the NDRC found that the two companies had seriously violated the PRC Anti-monopoly Law, in consideration of their proactive support of the NRDC investigations by providing evidence and cooperation which substantially facilitated the investigations, NDRC decided to exempt these two companies without any penalty. Its purpose was to inspire other companies currently engaged in cartel activities in various industries to proactively cooperate with NDRC’s anti-monopoly enforcement.

The Shanghai NDRC also penalized a renowned U.S. automobile manufacturer on the ground that it had entered into vertical agreements with three distributors restricting their resale prices. Shanghai NDRC fined the manufacturer RMB31.6820 million (roughly $5.15 million) and a total of RMB2.1421 million (roughly $348,207.02) on the three distributors, respectively.

As a matter of policy, the NDRC initiates an investigation under its very limited resources only after it has collected solid evidence about cartel activity. Whistleblowers—such as the two companies granted immunity in the investigations referred to above, usually provide such solid evidence. The NDRC deals with a whistleblower in a careful manner, however, and will not initiate an investigation, or strike a company in a dawn raid, without solid evidence showing that there is indeed a likely anticompetitive horizontal or vertical agreement.

Is Enforcement Biased Against Foreign Companies?

There have been criticisms that the NDRC’s recent enforcement activities have demonstrated a strong bias against foreign companies, especially in industries where foreign companies are market leaders or dominant, such as automobile manufacturing. However, the record does not support these claims. In a recent case, NDRC penalized Zhejiang Insurance Association, a PRC industrial association, due to its formation of a horizontal agreement by and between its subordinate insurers to fix the fees charged by agents for commercial automobile insurance. The penalties attributable to such cartel agreement consisted of RMB500,000 (roughly $81,277.02).

What Should A U.S. Company Do Going Forward?

Several NDRC investigations are ongoing. Antitrust enforcement will expand to other industries in order to purge any unfair competition and monopolies currently existing in the market in China. Additionally, in the future, it is likely that the NDRC may collaborate with other enforcement authorities in its investigations. Hence, all the players in a market have to learn from the lessons imposed on their peers.

How should be this done? If a U.S. company desires to compete in the PRC in a manner that is compatible with the Chinese market, it should review or formalize its antitrust compliance policy, ensure that it is active and that its employees are aware of the significance of such policy. Like Foreign Corrupt Practices Act and anti-bribery compliance, we believe that antitrust compliance policy may increasingly become a critical strategy in the PRC. Of most importance in the PRC, such a compliance policy must strictly prohibit the sharing of price information with competitors in all manners-- letter, phone, email and oral communications.