In early March, 2010Diageo, the world’s leading spirits maker signed a deal whereby it acquires majority shares of SiChuan Quanxing Group, a holding company that owns Shui Jing Fang(水井坊), reputedly China’s oldest white wine. What is remarkable about the transaction is that it is the first case in which foreign capital takes over Chinese white wine. To further make the deal unique is how surreally the white whine came into being. In 1998, Quanxing Group discovered a relic site when its workers were in the process of renovating factories. Archeological excavation showed that the site was originally a wine making workshop that dates back to Yuan Dynasty, over 600 years ago. With state-of-art bio technology, several active microbes were obtained from the workshop and used to produce the white whine, branded Shui Jing Fang(水井坊). The relic site was also listed by Guinness World Records as the world’s oldest wine making workshop.

On a rough look, the Diageo/Shui Jing Fang deal is remarkably similar to the Coca-Cola bid for Hui Yuan . For example, both involve world famous brands buying Chinese famous local brands, in effort to tap into the ever increasing beverage market in China. Given the doomed Coca Cola/Hui Yuan transaction on antitrust account, one is tempted to ask whether history will not repeat itself this time. Meanwhile, media report says Diageo is preparing regulatory filing with MOFCOM, which is the authority charged with policing merger market to prevent anticompetitive consequences. There are also market speculations on the fate of the deal in the hand of MOFCOM.

Market Definition

The first interesting issue to explore is market definition. Like other jurisdictions, and perhaps even more so, market definition plays a key role in Chinese enforcement of Anti-Monopoly Law (“AML”). On 7 July, 2009, the Anti-monopoly Commission of the State Council, the apex entity in China’s hierarchical structure of AML enforcement, promulgated the Guidelines on the Definition of Relevant Market. The Guidelines provide that defining relevant market is the starting point for analyzing competitive conduct and constitutes an important part of AML’s enforcement.

The Guidelines provide for two methodological approaches to market definition, i.e., the demand/supply substitution analysis and SSNIP. According to the Guidelines, however, it seems that the demand/supply substitution test takes precedence over SSNIP, as the latter applies only when the market scope is unclear or too difficult to define.

There are three likely candidates for the relevant market analysis in this case: spirits, Chinese spirits or premium Chinese spirits.The author is inclined to think that the relevant market in this case will be carved out around the premium Chinese spirits. As the Guidelines point out, market definition test will be done mainly by reference to consumer’s point of view. In that spirit, MOFCOM will probably look to a set of parameters, namely functions, qualities, price and market access to commodities in performing market analysis.

In China, the white whine market is highly stratified. On the top is the premium market, which is characterized by hefty price, high brand recognition, enhanced status embodiment and nationwide distribution. Market study also uses price as benchmark to classify the white whine market. For example, there are market study reports which state that in the premium white wine market, defined by price range above 300RMB, Mao Tai(茅台) (the white wine served in Chinese state banquets) has market share of 37.5%, Wu Liang Ye (五粮液)32.95%, Lu Zhou Lao Jiao (泸州老窖) 11.77% and Shui Jing Fang(水井坊) 7.9%. On top of that, a large body of Chinese spirits occupies the middle category, which has lower price range than the premium, and are distributed and consumed mainly in local markets where they are made. By all means, from the consumers’ viewpoint, it’s hard to imagine that the second category spirits are substitutable with the premium category, because the latter has greater margin of pricing power without fearing to lose business such that the price increase is unprofitable.

Conglomerate Merger

The issue of market definition is important also because it determines how to characterize the deal. If foreign spirits are found to constitute part of the relevant market together with Chinese white wine, the analytical framework is going to be horizontal merger. If not, conglomerate merger analysis will probably prevail. Given the author’s inclination to think that the market is going to be defined as Chinese premium spirits, MOFCOM will pursue a conglomerate merger analysis.

Notably, the Coca-Cola/Hui Yuan is horizontal merger by nature, because MOFCOM found that both compete in Chinese fruit juice market. However, the theory upon which MOFCOM rejected the deal comes from conglomerate merger paradigm, namely market power transfer theory. According to MOFCOM, Coca-Cola has 60 percent in carbonated soft drink market (CSD market). Under AML, the figure suffices to establish a prima facie case that Coca-Cola has dominant position in CSD market. Without showing its reasoning, MOFCOM further presumed that Coca-Cola might transfer the dominant power in CSD market to fruit juice market by virtue of tying and bundling, thus eliminating incumbent fruit juice makers. It’s not clear whether MOFCOM follow the due process rule by affording Coca-Cola to rebut the presumption. Even if it does, it is obvious that Coca-Cola failed in the task.

In other jurisdictions, conglomerate merger is treated with more leniency than horizontal, because of its great efficiency potentials. Even if they might be susceptible to harmful effects in the relevant market, it is usually the scrutinizing authorities’ burden to expose its ex post reasoning and prove that the harmful effects are more likely than not to happen. Where circumstances allow, the authorities would resort to “natural test” to show that the party has committed the anticompetitive conducts in question in the past and thus has the incentive and inclination to repeat it after the merger. However, the Coca-Cola/Huiyuan merger filing has created a precedent that should one party is found to have dominant position in market other than the one relevant to the merger, a prima facie case of anticompetitive effect is established and the burden of proof is shifted to the party to rebut the presumption.

Whether MOFCOM would apply the same analysis in Diageo/Shui Jing Fang case remains to be seen. To do so, MOFCOM would have to look at the foreign spirits market in China and test the market position of Diageo. At the risk of premature conclusion, the author is inclined to think it’s negative. There are already several key players in Chinese market of foreign spirits, i.e., Diageo, Pernod Ricard and Hennessy of France, Brown Forman of the United States and other whisky makers from Scotland. According to market report, Pernod Ricard has traditionally held the upper hand in the Chinese spirits market. The Shui Jing Fang deal will surely going to help Diageo to catch up, but there is a long distance to close between them.


Brand issue has several important implications in the current deal. As a foremost matter, the deal would not have been possible under Chinese current foreign investment policy. According to China’s Catalog for the Guidance of Foreign Investment in Industries, “Famous Brand” Chinese spirits are off limit to foreign capital, such as Mao Tai (茅台) and Wu Liangye(五粮液). Luckily, Shui Jing Fang (水井坊) isn’t one of them and that’s why the deal is possible under current foreign investment regime.

Brand is also relevant to market entry analysis in merger review. In its published reasoning of not clearing the Coca-Cola/Hui Yuan deal, MOFCOM cited that the post-merger Coca-Cola may greatly enhance its market power by controlling two well known brands: Mei Zhiyuan(美知源)owned by Coca-Cola and Huiyuan (汇源) owned by Huiyuan. According to MOFCOM, Coca-Cola’s ownership of two most famous brands in Chinese fruit market would constitute a formidable market entry barrier, lessening the restraint of potential market entry on Coca-Cola’s perceived inclination to raise price post merger. However, that concern is not applicable in the present case, because Diageo doesn’t compete in the Chinese white wine market.

The high brand recognition of Shui Jing Fang(水井坊)may also pluck the nerve of Chinese authorities’ industrial policy considerations. According to MOFCOM’s recently published Measures on Review of Concentrations of Undertakings, it may consult with and seek opinions from, among others, relevant government authorities and industry associations. It indicates that MOFCOM does not operate in an institutional vacuum. As a matter of fact, in its published opinions on two high profile cases, i.e., InBev/Anheuser Busch and Coca-Co/Huiyuan, MOFCOM mentioned that it did receive inputs from other relevant government authorities. Thus this gives rise to legitimate concern whether MOFCOM’s competition-oriented policy is subject to influences from other government bodies which harbor industrial policy concerns.

There are several indications that brand name factor is an important dimension in Chinese industrial policy. For example, the Outline of the National Intellectual Property Strategy, released by the State Council in 2008, makes reference to famous brands for Chinese companies as strategic goal of government action. Also, in the pre-AML period, when acquisition of Chinese companies by foreign investors was regulated under the Regulation on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, MOFCOM required a separate filing procedure where the acquisition involved the “transfer of actual control in a domestic company holding famous trademarks or time-honored Chinese trade names.” From the above it is clear that China’s industrial policy aims to promote the creation and preservation of famous brand names by Chinese companies. It’s hard to predict whether the concern will not have an effect on MOFCOM’s final calculus.

However, that concern can be somehow allayed in this case by the supposition that Diageo lacks motives to hurt the brand name of Shui Jing Fang. In a highly brand-conscious spirits market in China where the price is determined by the extent of brand recognition and the perceived status it represents, Diageo has every commercial incentive to invest in the promotion of the brand in Chinese market. As illustrated in the above, premium Chinese white wine is a highly protected industry. Shui Jing Fang is probably the only choice left to Diageo to invest in the Chinese rapidly expanding premium market. Further, Diageo doesn’t compete in the Chinese white wine market. Thus it gains no economic interest to take the brand out of the market, as a direct competitor would otherwise do. Diageo’s CEO in charge of Chinese market is also quoted to say that it intends to enhance the market presence of Shui Jing Fang in foreign markets. If so, why not let the foreign customers get their share of China’s oldest white wine?