Out of their depth?

PUBLISHED : Monday, 27 June, 2011, 12:00am
UPDATED : Monday, 27 June, 2011, 12:00am


The minnows of the business world usually applaud the introduction of a competition law, seeing it as their shield against huge and predatory monopolies.

Not in Hong Kong.

Here, small and medium-sized enterprises are as suspicious of the coming law as the big conglomerates. That is at least partly because they feel burned by unexpected details in the minimum wage law, which many had initially supported. They are particularly concerned by what they see as vagueness in the draft bill: detailed guidelines will not be drawn up until after the law takes effect.

'We won't know if genuine troubles are in store until after the bill's passage in July next year,' said Danny Lau Tat-pong, chairman of the Small and Medium Enterprise Association. 'We understand the government's goodwill about helping us, but the current draft cannot achieve that purpose. Many key terms are undefined: just what is a 'market'?'

The voice of small and medium-sized firms needs to be heard. Last year they made up more than 98 per cent of local enterprises, according to Census and Statistics Department figures. These 290,000 companies accounted for 48 per cent of private-sector employment - hiring up to 100 workers each in manufacturing businesses and 50 in the non-manufacturing sector.

After becoming chairman of the association in 2006, Lau did something that seemed counter-intuitive - he expressed support for a statutory minimum wage.

'We theoretically agreed with protecting the underpaid, low-skilled workers. And we thought the logic was simple: pay HK$6,000 to employees who were earning HK$4,000,' said Lau, who runs a building-materials business and two subsidiaries.

'But now, only a short time before the law takes effect, problems that were never mentioned in the past few years have erupted.'

He was referring to the controversy over whether rest days and meal breaks should be included in calculating the wage. Unions are accusing employers of exploitation; employers are blaming labour for raising their bid at the last moment; and both are lambasting the government for the guidelines' ambiguity.

Many businesses feel the competition law is heading down the same path. 'Small companies essentially want fewer laws, which inevitably take away freedom,' said Lau, whose association has more than 800 member enterprises with more than 10,000 employees. If a competition law really needs to come, 'better [if it's] not this one', he said.

The government has proposed a competition commission that will draw up detailed guidelines, define key terms and anti-competitive behaviour. The benefit of this approach - limiting the main law to general prohibitions, and letting the commission explain them later - is its flexibility, officials say.

Yet small businesses see traps that may pose extra costs in legal compliance, Lau said. 'When annual turnover for some members is a mere HK$1 million and legal advice costs a few thousand dollars per hour, the burden is really heavy for us just to understand the law, let alone to see if our contracts and practices toe the line.'

Two rules of conduct lie at the centre of the current draft, which is undergoing scrutiny in the Legislative Council. The first tackles anti-competitive agreements, including hard-core price fixing, bid rigging and market sharing. The second prohibits abuse of market power.

While the commission can launch investigations itself or upon complaints, it can also bring cases to the envisaged competition tribunal, which is to be made up of judges from the Court of First Instance. The bill also grants individual rights to private litigation. If an undertaking is deemed anti-competitive by the tribunal, a penalty equal to a maximum of 10 per cent of the global turnover of the company concerned will be ordered.

Under the draft, the commission may also issue infringement notices on less serious offences, before bringing cases to court. A market-share threshold will be set to protect smaller companies. But the level of the threshold will again be set by the commission after the bill is passed.

An agent for a canned food brand, who wanted to remain anonymous, told of his confusion. 'There is only my company and another two agents permitted to sell that brand of food in Hong Kong,' he said. 'If a company wanted to get a franchise from the mother company but failed, would I be accused of preventing a fourth competitor from entering the market? Do you confine a market to that brand itself, or to all available brands of that kind of product as a whole?'

He also feared that his daily exchanges with another agent might lead to trouble. 'I have regular meetings with that owner, due to my good personal relationship with him. Due to the proximity of our businesses, you can imagine our conversations touch on the canned food we sell - including pricing. Does that count as price fixing?'

The Guidelines on the First Conduct Rule - issued by the government on May 30 - offer 12 examples of possible breaches of the first of the measure's three conduct rules, including fixing trading conditions and engaging in joint purchasing or selling. Yet businesses say their worries remain unresolved.

Some small companies welcome the new law, however.

Lee Kwong-lam, a food importer supplying products to the major supermarket chains, said the law would help such business survive.

'The distorted market for supermarkets is killing suppliers. Without a competition law, we have nowhere to lodge complaints,' said Lee, whose Tung Tai Hong company supplies food products to major supermarkets and runs its own wholesale outlets.

Supermarkets and suppliers work on unequal terms, Lee said.

'Small suppliers have no pricing power. Supermarkets can push the unit price down as far as our cost price. We earn nothing from those contracts, but cannot give them up ... after all, the two major supermarket chains account for 80 per cent of the market,' he said.

When certain products sell well, supermarkets then produce the same products under their own brand, Lee said. 'When a certain type of toilet paper is popular, the supermarkets will manufacture the same thing with their own brand and put it beside the popular one,' he said.

Supermarkets can lower the prices of their branded products by skipping the supplier stage in the production process.

The two largest supermarket chains in Hong Kong - ParknShop and Wellcome - both have their own brands. Wellcome claims its No Frills brand, which covers more than 300 products, is the cheapest among the similar products on the market. Wellcome sells more than 1,000 products under the brand First Choice, and tags on its store shelves claim they are 'Cheaper than similar products by at least 10 per cent.'

ParknShop owns 10 brand names including Best Buy and Select.

How far can the proposed commission go in investigating complaints? The importance of this question was shown in 2008, when the Competition Policy Advisory Group famously ruled that a high-profile complaint against a supermarket had not been established.

A supplier had lodged a complaint against the supermarket in 2006 for unilaterally raising the retail price of the supplier's products - then removing his products upon the launch of similar products under its own brand name - before the end of the supplier's one-year contract.

The Consumer Council, commissioned to investigate the case, said it was unable to approach the supermarket for verification of the allegations 'due to the limited information provided by the supplier'. It 'could not interview the supermarket to assess the reasons... without exposing the complainant's identity'.

But the future commission will be granted investigative power.