China Law Vision : China Insurance & Anti-Trust Lawyer : Dr. Zhan Hao : Grandall Legal Group : Anti-Monopoly & Competition Law : China Law Vision Blog

Founded in 1866 by Henri Nestlé in Vevey, Switzerland, Nestlé is the world's leading Nutrition, Health and Wellness company. Nestlé’s product lineup covers from baby food, bottled water, cereals, chocolate & confectionery, coffee, culinary, chilled & frozen food, dairy, drinks to food service, healthcare nutrition, ice cream, petcare, sport nutrition, and further to weight management.

Hsu Fu Chi is China’s largest listed confectionery company, with more than 16,000 sales outlets and 100 sales affiliates. In connection to its revenue, the first quarter of 2011 alone was Rmb1.51bn ($234m). Hsu Fu Chi focuses itself on chocolates, pastries and other sweets markets, and particularly is famous for a breakfast bar called Sachima. It should be recognized that Hsu Fu Chi already developed into a national brand within two decades. Voices from different communities, hence, expressed their worry that this event may ignite nationalist outcries just as it did with Coca-Cola's negotiations with Huiyuan.

From a legal point and preliminary view, this concentration may bring about many anticompetitive effects. Firstly, both Nestlé and Hsu Fu Chi are strong market players in Chinese market with regard to their own products, respectively. (Without exact and concrete market share statistics though). Secondly, there is horizontal overlap between the two “Mr big”, namely, on the product market of confectionery. In a further consideration, the occurrence of penetrating effects between different markets of Nestlé and Hsu Fu Chi cannot be excluded from concerns in any means. Therefore, Nestlé’s action also triggered a school of worries that it may encounter the same judgment as Coca-Cola (KO) and juice maker China Huiyuan Juice Group in 2009.

As far as the author concerned, nevertheless, Hsu Fu Chi harbors still the hope of being cleared given that the following grounds:

Firstly, Hsu Fu Chi has not such a powerful market position as Coca cola has in consideration of the situation of confectionary market. (6.6% in 2009) Besides, it has been seen that the trend of mergers and acquisitions in China's confectionery industry recent years has facilitated cooperation in many creative levels, and accordingly inflamed more fierce competition and more pressure on local players. Consequently, concerned acquisition here also give rise to many precompetitive effects on the relevant market.

All in all, how the Ministry assess and balance the concentration at issue is still of full suspicion.

Relevant markets

Anti-infection and anti-inflammatory drugs
The products affected by the acquisition are anti-infection and anti-inflammatory drugs used to treat eyes, particularly for post-surgical infections. Novartis's and Alcon's products are sold under the Infectoflam and TobraDex brands, respectively.

After the concentration, Alcon's share of the Chinese market will exceed 60% and Novartis's share will be less than 1%. According to information in the filing, Novartis has made a strategic decision to withdraw from the Chinese and global markets.

In deciding to approve the acquisition with conditions, the ministry considered that if Novartis's decision to exit the market were motivated solely by the purposes of the acquisition, it would still be able to re-enter the market after the transaction and either eliminate or restrict competition in the Chinese market.

Contact lens care products
The post-acquisition enterprise will have almost 60% of the global market for contact lens care products and almost 20% of the Chinese market, making it the second-largest player in China after Hydron Contact Lens.

In 2008 CIBA Vision Shanghai, a Novartis subsidiary, signed a sales and distribution agreement with Hydron whereby the latter became CIBA Vision's sole distributor in China. The arrangement makes CIBA Vision Shanghai and Hydron strategic partners. However, it will also give the post-acquisition enterprise and Hydron the motive and opportunity to engage in concerted pricing practices and to restrict the volume and location of sales of their products with the effect of eliminating or restricting competition.

In order to mitigate these competition concerns, the ministry has imposed conditions on the transaction.

Conditions

Anti-infection and anti-inflammatory drugs
Novartis is required to cease sales of Infectoflam in China by the end of 2010. In addition, the ministry has stated that:

• for five years after the decision's effective date, Novartis may not reintroduce Infectoflam (or the same product under a different name) into the Chinese market;
• until the acquisition is completed, Novartis may not sell other ocular anti-infection or anti-inflammatory drugs that are sold in other countries in the Chinese market; and
• for the next five years, Novartis must report annually to the ministry on its compliance with its promise.

Contact lens care products
The CIBA-Hydron agreement must be terminated within 12 months of the ministry's decision. The relevant party will then have one week in which to notifiy the ministry of the termination.