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

Without many disputes, Nestlé’s market share in Chinese confectionary market would be much higher ex post this transaction. According to the market sources, Hsu Fu Chi’s greatest strength lies in bulk sales, while Nestlé is good at package sales. It is highly anticipated that combination of Nestlé and Hsu Fu Chi would give rise to a synergy effect, hence would influence Chinese confectionary market in a significant degree.

A spokesman from Nestlé publicly expressed there would not be major changes on the company’s development direction and employee after the concentration. Nevertheless, when asked if Hsu Fu Chi has the plan to develop high-end product after Nestlé joins in, he said, there existed various possibility.

First, China Telecom undertakes to expand the capacity which is connected to other backbone telecommunications operators such as China Unicom and China Tietong as soon as possible.

Second, China Telecom undertakes to lower the price of connecting to China Tietong and enhance the quality of interconnection in the further step, so as to achieve a full-degree of interoperability.

Third, it will standardize the tariff management of ISP, conduct commercial activities in accordance with fair trading principle on the market and review currently existed agreements to cut the tariff level in a proper degree,

Fourth, China Telecom will immediately take measures to enhance the fiber access penetration and the broadband access rate, with the end of lowering the price for per unit of bandwidth for public customers of internet access by around 35%.

Whether NRDC would be charitable to the state-owned enterprises and suspend concerning investigation after above-mentioned application and proposal, is still open and the response of NRDC thereto is looked forward to.

The notice states that the would-be acquirer, Penelope, was incorporated specifically as a tool for the transaction. Alpha Private Equity Fund V is Penelope's wholly-owned controlling shareholder - it invests in non-ferrous metal recycling and the production and sale of textile and home textile machinery. Alpha V is the largest shareholder in Uster technologies Co Ltd, holding 27.9% of the equity shares.

Savio, the proposed target, is a manufacturer of textile machinery. It produces electronic yarn clearers for winders, twisters and rotor-spinning frames. Phenanthrene Brothers Co Ltd is a wholly owned subsidiary of Savio.

In its preliminary investigation the ministry found that Uster and Phenanthrene Brothers are the world's only two manufacturers of electronic yarn clearers for automatic winders (with market shares 52.3% and 47.7%, respectively). Furthermore, the ministry found that the market for electronic yarn clearers for automatic winders constitutes an independent relevant market. It confirmed the possibility that Alpha V might coordinate the business operations of Uster and Phenanthrene Brothers following the concentration, thereby eliminating or restricting competition in the market; similarly, Uster and Phenanthrene Brothers might engage in anti-competitive practices to eliminate or restrict competition in the market through their intermediary, Alpha V.

In early October 2011 the ministry and the parties to the concentration engaged in several rounds of communication about measures to alleviate the ministry's competition concerns. The final consensus was sufficient for clearance by the ministry on the following conditions. Alpha V must:

• transfer its equity in Uster to one or more independent third parties within six months;
• inform the ministry of the identity of transferee, the transaction volumes and the trading date, in order to ensure that the transfer does not result in the further elimination or restriction of competition;
• refrain from participating in or influencing Uster's business operations before the transfer; and
• appoint an independent supervising trustee to supervise the equity transferee.

The previous minimum annual fees of Rmb6,000 were raised to between Rmb30,000 and Rmb60,000, while the security deposit was raised from Rmb10,000 to Rmb50,000, Rmb100,000 or Rmb150,000, depending on the size of the business-to-consumer vendor. Smaller vendors protested by disrupting the online platform, using communication tools such as YY Voice to attack companies with a larger presence on Tmall. The incident sent ripples through the worlds of business, academia and politics, with many critics arguing that the price-rise policy may constitute an abuse of dominant position under the Anti-Monopoly Law.

Determining dominant position in a given market is problematic; in most cases, it requires comprehensive market research and subtle, detailed analysis. The answer may be the length of an academic paper and may take weeks to compile and express clearly. If it is assumed that Tmall holds a dominant position, there remains the question of whether its behaviour can be deemed an abuse under the law.

Article 17(1) states that an abuse consists in imposing unfairly high sale prices or unfairly low purchase prices. On the sale side, "excessive" prices may be unfair. Excessive pricing is the most obvious way in which a monopolist can exploit its position to the detriment of consumers in the short term. However, it is often argued that a free market economy needs the lure of monopoly pricing. On this analysis, the opportunity to charge monopoly prices - at least for a short period - is what attracts business acumen in the first place, encouraging the risk taking that produces innovation and economic growth.

Furthermore, excessive prices may be pro-competitive, as high prices and profits may act as a signal to attract new competitors to the market. Therefore, high prices - within reasonable limits - should not automatically be deemed excessive or unfair.

It is unquestionably difficult to decide what constitutes an excessive or unfair price. Given that it is rarely possible to ascertain what the price might have been in a more competitive market, what other yardstick can be used? How should competition policies be balanced against state policies in other sectors, given China's macroeconomic background? Should such a policy protect small and medium-sized businesses or encourage emerging business? All of these questions should be considered when deciding whether Tmall's price-rise policy should be classified as abusive.

The trigger for this lawsuit lands on the claim that Taiyuan Railway Bureau (“A” hereinafter) has not responded to the application from Shanxi transport Group Co., Ltd, (“B” hereinafter) of additional tickets outlet, in spite that B has been applying for the authorization since 2007.

According to the case description presented by B in the Indictment, the key points decisive to the case analysis are summarized as follow by sequence number:

1) Party A is an administrative body, exercising administrative functions granted by laws and administrative regulations and in the connection to the said litigation, A is responsible and holds the power to authorize to set up ticket outlets within the its jurisdiction.

2) Party B owns 13 of 40 ticket outlets until May of 2006, hereafter while, a total of 74 new outlets authorized by Party A without exception are established by service-oriented enterprises owned by Party A themselves.

3) Party B has been applying for approval of setting up additional outlets for 4 years since 2007, but yet received reply from Party A.

4) Failing to get sufficient access to the essential facility of distribution (distribution right) has significantly affected Party B’s service quality and further consumers’ interests, as a consequence, a healthy competition process in the market for distribution service of rail tickets in Taiyuan is distorted and restricted in a large degree.

In view of the long history of antitrust enforcement in the States and its Atlantic counterpart, European Union, suing the public agency with administrative function on the ground of antitrust is not common in both U.S. and EU considering the reason that the main job of antitrust law is to regulate conducts of undertakings, instead of that of administrative bodies. Nevertheless, it has its own existence significance in China, which is classified to the concept of “administrative monopoly”.

Administrative monopoly is defined as the executive abuse of administrative power to eliminate or restrict market competition. Except for the general features of economic monopoly, it is caused in most cases by the pursuit of local or sector interests related to the administrative body, hence, could incur greater harm to competition. Given that the unique situation of China, Anti-monopoly Law of PRC (AML) specifically entrenched itself with the concept of “administrative monopoly” in Chapter 5. It enumerates the most frequent illegal act of this class, such as administrative forcing deal, regional blockage, and administrative force of anticompetitive conduct and so forth. Meanwhile, it also prohibits the abstract administrative act with anticompetitive elements. But it is worth noting that there are not specific provisions in relation to negative administrative monopoly existed, such as the circumstance discussed in this article.

For that reason, we have a lot of expectations to observe how the court will decide the case as well as correspondingly how the court will argue for its judgment, which shall play the role of guidance for the judicial practice afterwards with respect to administrative monopoly.

It should be recognized that the Regulation reflects great significance in many facets without doubt. For one thing, the substantive process of reviewing and assessing concentrations by the Ministry of Commerce is tranparentized in a large degree. As a result, relevant competitors, consumers and other stakeholders of interest could obtain much more convenience for the purpose of supervising antitrust enforcement.  

In the second place, the Ministry took this opportunity to standardize in the Regulation, which factors that they will take the most account into in principle, which interests they will consider principally when balancing the pro-competitive and anti-competitive effects of concentration concerned. In this connection, the Regulation would possess the function of conducting, standardizing as well as facilitating the work of antitrust control to concentrations of the Ministry.

For another, as the role of “Guidelines on the Assessment of Horizontal Mergers” of EU, the Regulation is also anticipated to take the responsibility of directing enterprises themselves to pre-assess competitive effects of their concentrations before notification in a proper way, therefore, is meant to lower the cost of concentration as much as possible, both for enterprises and for the Ministry (administrative costs). In any sense, consequently, we have to say that this Regulation fresh out of the oven on August, 29, 2011 is good news, meanwhile, enhances the enforcement of China’s control of concentration to a new phase.

Taking a closer sight on its content, throughout the Regulation, no other articles occupy more importance than Article 3 and Article 4, which are the soul and core of this guideline. Article 3 sets out the main factors specifically, by which the Ministry assesses the competitive effects of concentrations.

In Article 4 the Ministry highlights the most commonly occurring example of a significant impediment to effective competition, that is, the creation or strengthening of ability, incentive and possibility to prevent and restrict competition. What worth noting is that Article 4 paragraph 2 clarifies that, for oligopolistic market, it is sufficient for a refusal to clear a concentration if the above-mentioned ability, incentive and possibility to prevent and restrict competition are collectively possessed by two or undertakings. In other words, the creation or strengthening of a collective dominant position is also the target of Chinese control of concentration.

Except for Article 3 and Article 4, Article 5 to Article 10 are mainly detailed and unfolded explanation of Article 3. Article 5 is the elaboration of Article 3 (1); it indicates the significance of identifying market share and market power as well as the elements that determination of market power would rely on, such as the substitutability of products or services between undertakings of concentration. Similarly, Article 6 gives more details to Article 3 (2), regarding what is the concept of market concentration degree and two instruments (HHI and CRn index) that usually could be employed to conduct a quantitative analysis of market concentration degree.

In addition, another feature in the Regulation is well-marked, namely, consumer welfare is paid much attention, in line with the revolutionary tendency of antitrust law in a lot of jurisdictions. In recent decades, more and more countries have started to add consumer welfare into the objectives of their antitrust law, even the number one objective in some jurisdictions. Both Article 8, 9 and 10 mentioned that concentrations of undertakings will promote the interests of consumers from different aspects, for example, consumers could benefit from upgraded technologies, higher quality, lower price resulted from concentration of undertakings, and so forth. On the contrary, the Ministry may also take the damage of consumer welfare as the reason not to clear a concentration.

Whether antitrust law should only perform its economic regulatory function, or should also help realize some social goals, like guarantee of employment? This issue is still very controversial in many countries. In Europe, some scholars take the view that antitrust law should not take more load than it is supposed to take, that is, economic aims. However, Article 12 of the Regulation specifically makes clear that public interest is also one factor to assess the competitive effects of concentrations in China. This point should in any means draw the attention of foreign investors. In case that one enterprise is facing bankruptcy, then the acquisition of such an enterprise may solve the potential problem of unemployment, hence is beneficial to public interest. In this case, even concerned concentration would give rise to some anticompetitive effects, clearance is not impossible absolutely.

Last but not least, Article 13 provides that in case the concentration has effect of preventing and restricting competition on relevant market, the Ministry of Commerce shall not be cleared, unless undertakings are able to prove the adverse effects are weighed out by beneficial effects or concerning concentrations are in accordance with public interest.

All in all, this freshly baked regulation set out standards to direct the Ministry’s work in terms of assessing the competitive effects of concentration in Chinese market, which is beneficial both for promoting the enforcement quality and for conducting undertakings’ notification process.