China’s antitrust crackdown threatens a more hostile climate for Western businesses

China's antitrust crackdown on firms including technology and car companies may presage a more hostile climate for Western businesses

PUBLISHED : Tuesday, 12 August, 2014, 10:48pm
UPDATED : Wednesday, 13 August, 2014, 9:06am

China's antitrust crackdown threatens to end the era when products from Audi saloons to Starbucks lattes generated fatter profits in Beijing than in London or New York.

In the past month, antitrust authorities have pressured at least seven carmakers to cut prices. Officials raided the offices of software maker Microsoft, Qualcomm, Caterpillar, Mead Johnson Nutrition and Danone among other foreign businesses have fallen under anti-monopoly scrutiny since last year.

The probes, combined with signs that the central government is shunning some US technology companies for security reasons, have left foreign businesses struggling to figure out the evolving laws and regulations in the world's most populous country. Those that try to adapt must interpret vague rules in an economy that's no longer as reliant on foreign investment as in past decades.

"We may be seeing a paradigm shift where the rules of the game are changing," said David Loevinger, former US Treasury Department senior coordinator for China affairs and now an analyst at TCW Group. "Until people figure out the new rules it will create a much more uncertain business climate."

We may be seeing a paradigm shift where the rules … are changing

Car companies - Audi, BMW, Mercedes-Benz, Jaguar Land Rover, Chrysler, Toyota and Honda - have announced price cuts on vehicles or spare parts since last month after the National Development and Reform Commission (NDRC) began investigating more than a dozen car manufacturers.

The NDRC, the chief economic planner, takes primary responsibility for overseeing pricing and is one of three government bodies that enforce the antitrust laws.

Carmakers cut prices after state-run media criticised how spare parts could trump the cost of a new car. For example, replacing all the parts of a Mercedes C-class saloon can cost 12 times the price of a brand new model, according to an April report by the Insurance Association of China and China Auto Maintenance & Repair Association.

"There's a concerted effort on the part of multiple regulators in China to aggressively enforce the regulations," said Kent Kedl, managing director for Greater China and North Asia at Control Risks. "They are being much more aggressive now than we have ever seen."

For Volkswagen, the Chinese market is so profitable that its earnings there, along with those of Audi, generate all of its cash flow, according to estimates by Max Warburton, an analyst at Sanford C. Bernstein, in November.

Beyond cars, Starbucks generates operating margins of 35 per cent in its China/Asia Pacific region, higher than Europe's 9 per cent and the 24 per cent in the Americas. Drugmakers have generally seen higher profit margins in China than in Europe, although that's changed for some companies last year, according to Philippe Lanone, an analyst at Natixis Securities.

Li Pumin, a spokesman for the NDRC, said last week that the investigation was aimed at maintaining market order and protecting consumers.

Besides the NDRC, the State Administration for Industry and Commerce (SAIC) said last month it began probing whether Microsoft's Windows operating system and Office software violate the anti-monopoly law.

Some companies have benefited. Control Risks, which specialises in providing political and security advice, has seen a doubling of its business in the past year as more clients find themselves under investigation by Chinese authorities, according to Kedl. Sebastian Evrard, a partner at the Jones Day law firm in Hong Kong, said he's seen a spike in demand for antitrust advice over the last year, with companies rechecking pricing and corporate relationships.

While antitrust cases in the United States are pursued by the Justice Department and the Federal Trade Commission, and in Europe by the European Commission, oversight in China has been split into three since its anti-monopoly law went into effect in 2008. Cases fall under NDRC jurisdiction when involving prices, the Ministry of Commerce assesses the legality of mergers and acquisitions, and other anti-competition cases fall under the SAIC.

Faxes sent to the NDRC, Ministry of Commerce and SAIC went unanswered.

Having a triumvirate can be confusing as the boundaries between each agency can be obscure, said Akira Moriwaki, the chief representative in Shanghai at the law firm Anderson Mori & Tomotsune. "There's a lack of transparency in law enforcement," said Moriwaki. Whistle-blowers "won't even know where to go to," he said.

It's more than just antitrust. Technology companies have been under fire after last year's revelations by former National Security Agency contractor Edward Snowden and the US indictment in May of Chinese military officials on cyberspying claims.

The following month, a microblog commentary from the Communist Party mouthpiece People's Daily said Apple, Microsoft, Google and Facebook cooperated in a secret US programme to monitor China. CCTV has broadcast claims that iPhone software could be used to help steal state secrets - allegations Apple has denied - and people familiar with the matter said this month that China's procurement agency recently told central government departments to stop buying antivirus software from Symantec and Kaspersky Lab because of security concerns.

Then there was the October campaign by state media accusing Starbucks of charging too much for coffee and saying Samsung smartphones didn't work. Samsung later apologised to Chinese customers, while Starbucks received an outpouring of consumer support after the reports. GlaxoSmithKline, the British drugmaker, has been under investigation for bribery since last year.

More recently, a scandal erupted last month for some of the world's best-known food chains - including McDonald's, and Yum Brands' KFC and Pizza Hut - after state television reported that they used meat past its expiry dates. The Shanghai authorities have since ordered McDonald's, Yum Brands , Burger King and other foreign restaurant chains to disclose their product sources as the city seeks to regain consumer trust.

But while the US Chamber of Commerce warns that China is losing its appeal as the top investment destination for American companies, China says concerns of a coordinated attack are unfounded.

"Fears that China, once the hottest growth market for Western firms, is turning chillier are totally misplaced," Xinhua said in an unsigned commentary on July 30. "No company is allowed to break laws with impunity in China, be it Chinese or foreign, state-owned or private."

Xinhua cited antitrust investigations of China Telecom and China Unicom (Hong Kong), fines for alcoholic drink manufacturers Kweichow Moutai and Wuliangye Yibin and local jewellery manufacturers as examples of how the government has subjected domestic companies to scrutiny.

Foreign companies will continue to be treated as equally as local companies and welcomed by China , Ministry of Commerce spokesman Shen Danyang said. However, foreign investors must strictly abide by Chinese laws and discharge their social responsibilities, especially concerning food safety.

Some global companies are retreating: Revlon , the cosmetics maker, said in late December it would cease operations and eliminate about 1,100 positions in China. Japanese dairy company Meiji Holdings in October announced it would pull out of China after 20 years.

"In the past China tended to give a little favour to foreign companies," said Bo Zhiyue, senior research fellow at the National University of Singapore's East Asia Institute and author of several books on China's elite politics. "Foreign companies have to unlearn what they have learned and they have to relearn how to make it work in China."